U.S. Tax Reform will help put more money into Corporate America’s coffers and allow companies to expand or potentially increase earnings growth. Investors may also find a targeted exchange traded fund approach to gain exposure to companies that would benefit the most through the tax changes.
The actively managed EventShares U.S. Tax Reform Fund (BATS: TAXR) seeks to provide exposure to those companies that are poised to see the greatest benefit from the implementation of significant tax reform in the U.S. The company may introduce additional tactical ETFs going forward. Past examples of tactical situations around which an EventShares fund might have been constructed include the Dodd-Frank legislation, Obamacare, Quantitative Easing, and Abenomics.
“For now, we continue to like companies that pay a tax rate above 30% and have strong company fundamentals,” Ben Phillips, CIO of EventShares, said in a research note. “We believe investors should hold companies that re-invest back in the business like how Southwest has proposed, while at the same time avoiding companies focused on short-term announcements (e.g. buying back stock or disbursing extra dividends). That’s why we’re skeptical about repatriation spurring growth–it’s a one time issue. This tax cut is a big opportunity for U.S. companies. We look for companies that invest after-tax cash flows in sustainable earnings growth, rather than artificially increasing EPS by decreasing share count. Reinvesting in company operations could be the gift that keeps on giving.”
TAXR is an unconstrained portfolio that has the ability to provide tactical allocations as the narrative around tax reform is molded. The fund seeks to offer a higher average market cap, lower forward price to earnings ratio, higher average tax rate, and higher percentage of companies actually generating taxable income.
The obvious affect of changes to U.S. tax codes would be an increase in profit margins for numerous U.S. companies. TAXR’s portfolio includes some of the higher tax payers that would benefit disproportionately more than other U.S. companies such as Caleres, Teradata, Ameren, Brown7 & Brown and more.
Lower corporate taxes also raises the competitiveness of U.S. exporters compared to international companies abroad since U.S. exporters can price exports at a more competitive starting point, which carries over the distribution chain. These exporters include those like AK Steel Holding, Advansix and Benchmark Electronics, among others.
Lastly, tax reform measures include expensing capital investments upfront and partially limiting corporate interest deductions, so companies would pay less taxes initially then more later once assets are paid off. This has historically helped fuel investment spending and increased demand for capital goods. The higher capital expenditures would benefit companies like Air Lease, CarMax and Southwest Airlines, among others.
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