Wall Street is fired up about President Trump’s push to overhaul the corporate tax system.
The relentless rally in the stock market has been powered by strong economic growth, low interest rates and hopes that tax cuts will turbocharge Corporate America’s already healthy bottom line.
But some stocks may benefit more than others from changes to the tax code.
For instance, companies that already pay low corporate tax rates, like Pepsi, may not cash in as much as those that pay Uncle Sam a much higher rate, like Under Armour. Companies pay different rates because of loopholes, tax reduction strategies and how much money they make overseas.
Much will depend on the details, most of which are still being hammered out in Congress and the White House. And there’s no guarantee tax reform will happen at all.
But there’s such intense interest in the negotiations that you can buy and sell a basket of stocks, the EventShares U.S. Tax Reform Fund, that could win big if the GOP tax framework becomes reality.
“If a vote passes, we think it has a multi-year, even decade-long, impact,” said Ben Phillips, a former Goldman Sachs exec who is now chief investment officer of EventShares.
Rather than simply holding low-tax stocks, this actively managed ETF includes nearly three dozen companies that Phillips believes could reap bigger rewards from tax reform than Wall Street realizes.
Here are a handful of the stocks this ETF is betting will win if tax reform happens:
Ford: Trump’s plan calls for slashing the corporate tax rate from 35% to 20%. That means Ford could afford to sell its cars overseas at lower prices, undercutting competitors. Phillips pointed out that Ford makes more cars inside the United States than any other automaker.
Chipotle: The Mexican food chain is grappling with slower sales and rising expenses in the wake of its food safety problems. Chipotle is also among the highest tax payers in the S&P 500, with an effective rate north of 40% in 2016, according to S&P Dow Jones Indices.
Denny’s: It’s another struggling fast food giant with a hefty tax bill. Phillips argues that Denny’s stock, which is flat this year, doesn’t yet reflect the potential benefits of an overhaul.
CarMax: The GOP tax plan would allow companies to immediately write off, or expense, the cost of new investments. That would be critical for companies like CarMax, a used-car retailers, that spend a lot of money each year on things like opening new stores.
Southwest Airlines: Like other airlines, Southwest spends billions each year to upgrade its fleet and buy new jets. Southwest pays a lot in taxes each year, too. Its effective tax rate was nearly 37% last year.
AK Steel: Phillips believes this company stands to benefit in two ways. Not only does AK Steel have heavy capital spending that could be written off under the GOP plan, but its exports to Europe and Canada could grow faster thanks to a tax break.
Phillips 66: The fund has very few energy companies. One is Phillips 66, which is known as Warren Buffett’s favorite oil company because Berkshire Hathaway is its biggest shareholder. Tax cuts could make Phillips 66 and other oil refiners more competitive.
W.W. Grainger: It’s been a terrible year for W.W. Grainger. The distributor of repair and maintenance tools has lost 17% of its value. But W.W. Grainger could win big from corporate tax cuts. The company paid an effective tax rate of nearly 38% last year, according to S&P Dow Jones Indices.