President Donald Trump’s aim to send a tax-plan outline to Congress within weeks helped Wall Street stocks hit record highs and kept hungry bears at bay. His plans to revive a ‘phenomenal’ tax cut plan invigorated hopes of a pro-growth agenda that took a backseat amid controversial immigration ban and protectionist trade policies.
Domestic companies, mostly referred to as small caps, have high effective tax rates and domestic revenue exposure. Hence, these companies are well positioned to disproportionately benefit from a reduction in tax rates.
‘Phenomenal’ Tax Announcement Coming Soon
Trump plans to overhaul tax codes for business and individuals over the next two to three weeks. In a meeting with members of the airline industry at the White House on Feb 9, Trump said that his goal for lowering taxes, especially for businesses, was moving “ahead of schedule”.
Press secretary Sean Spicer reiterated later that there will be an outline of a plan “that will address both the business side of the tax ledger as well as the individual rates”, while the president’s tax overhaul would be “something that’s going to spur economic growth”.
Wall Street is fairly upbeat on the positive impact of lowering of taxes. Such corporate tax cuts are expected to boost the S&P 500’s earnings per share by $8, according to Dubravko Lakos-Bujas, head of U.S. equity strategy at JPMorgan Chase & Co. (JPM).
Trump’s Revised Tax Plan
Trump has been working on the first major tax overhaul in more than three decades. Ever since 1986, the tax code hasn’t been refurbished, when President Ronald Reagan along with a divided Congress broadened the tax base and lowered marginal tax rates.
This time around, Trump proposed a multi-trillion-dollar tax cut that would boost the U.S. economy and lift corporate profits. Such a tax cut included trimming of the business tax rate to 15% from 35%, reducing individual tax rates and repealing the estate tax. He also wished for expanding tax break for child-care expenses.
Trump’s new tax plan, which will reduce federal taxes by $4.4 trillion to $5.9 trillion over a decade, is expected to increase GDP between 6.9% and 8.2% and create 1.8 million to 2.2 million jobs, according to the Tax Foundation. The foundation further added that growth is expected to be evenly distributed across all income groups.
Stock Barometers Logged Record Highs
Trump’s pledge to move quickly on changes to the tax code helped the broader market post a third straight weekly gain on Feb 10. All the four major U.S. stock indices including the Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite and the Russell 2000 registered record closing highs, marking the first ‘grand slam’ in two months.
The Russell 2000 index, in fact, was lagging behind its larger counterparts after small caps lost some of their momentum at the start of the year.
However, small caps have caught up to their larger members, thanks to Trump’s promises to cut tax rates
5 Biggest Gainer on Trump’s Tax-cut Promise
The biggest tax payers in America are the smallest companies. Trump’s corporate tax cut assurance had a greater positive impact on small caps, which tend to have higher effective tax rates and high domestic revenue exposure. Unlike large caps, small caps can’t stash profits in overseas markets.
Small-cap businesses, which are seen as more domestically focused, also are spared a proposed border-adjusted tax that would impose a levy on imports. As a matter of fact, such taxes are proposed to encourage domestic production.
It will, therefore, be prudent to invest in fundamentally sound domestic companies poised to gain from Trump’s corporate tax reform. We have, thus, selected five such companies that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a market capitalization less than or equal to $2 billion. Such stocks also boast a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics.
Such a score allows you to eliminate the negative aspects of stocks and select winners.
MidWestOne Financial Group, Inc. (MOFG) operates as the bank holding company for MidWestOne Bank and Central Bank that provide commercial and retail banking products and services. The company has a Zacks Rank #2 and a VGM score of ‘B’. MidWestOne Financial’s expected growth rate for the current year is 31.5%, higher than the industry’s projected gain of 11.4%. The Zacks Consensus Estimate for its current year earnings increased 1.4% over the last 30 days.
Brooks Automation, Inc (BRKS) provides automation and cryogenic solutions for various applications and markets. The company has a Zacks Rank #1 and a VGM score of ‘B’. Brooks Automation’s expected growth rate for the current year is 105%, above the industry’s estimated gain of 19.5%. The Zacks Consensus Estimate for its current year earnings rose 17.5% in the last 30 days.
Cross Country Healthcare, Inc. (CCRN) provides healthcare staffing, recruiting, and workforce solutions in the U.S. The company has a Zacks Rank #1 and a VGM score of ‘A’. Cross Country Healthcare’s expected growth rate for the current year is 14.4%, above the industry’s projected gain of 14.2%. The Zacks Consensus Estimate for its current year earnings advanced 4.4% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Francesca’s Holdings Corp (FRAN) operates a chain of retail boutiques. The company has a Zacks Rank #2 and a VGM score of ‘B’. Francesca’s Holdings’ expected growth rate for the current year is 16.1%, higher than the industry’s estimated gain of 0.3%. The Zacks Consensus Estimate for its current year earnings rose 7% in the last 90 days.
Momenta Pharmaceuticals, Inc. (MNTA) focuses on developing generic versions of complex drugs, biosimilars, and novel therapeutics for oncology and autoimmune diseases. The company has a Zacks Rank #2 and a VGM score of ‘B’. Momenta Pharmaceuticals’ expected growth rate for the current year is 38%, above the industry’s projected gain of 10.7%. The Zacks Consensus Estimate for its current year earnings increased 27.7% over the last 30 days.
Zacks’ Best Investment Ideas for Long-Term Profit
Today you can gain access to long-term trades with double and triple-digit profit potential rarely available to the public. Starting now, you can look inside our stocks under $10, home run and value stock portfolios, plus more. Want a peek at this private information? Click here >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report