Alaric Securities celebrates at Nasdaq MarketSite
November 6, 2017

Opinion: 5 Stocks that Could Win Big from the GOP Tax Plan

Alaric Securities

Nobody knows where the Republican tax plan will ultimately wind up.

For starters, this is just the early draft from the House, and there still are many issues to be worked out in the Senate. There’s also speculation about whether the fractured GOP majority can get its act together to get anything at all over the finish line after stumbling with past efforts like health-care reform.

Oh yeah, and with the S&P 500 SPX continuing to set new highs, there’s a bit of concern that passage of substantive tax reform is already baked in to the stock market… and lawmakers better deliver, or else Wall Street will feel the pain.

But regardless of the final details, some stocks clearly stand apart as leading beneficiaries of any legislative efforts. Here are five I am watching that seem to have very good upside regardless of how the dust settles on tax reform.

Car Max

Amid the tax-reform debate, there’s talk about allowing companies to immediately write off the cost of new investments. That would be a big boon to a company like CarMax KMX the used-car retailer that continues to grow at a brisk clip and invests a ton of money in new locations and new inventory.

CarMax spends a lot of money each year opening new stores that can cover up to 35 acres. As of its annual report in February, the company tallied 173 stores, up from 158 at the same time a year earlier for a roughly 10% increase. It spent roughly $420 million in the last fiscal year to open those locations.

The ability to immediately get a break on that spend is a boon to a capital-intensive business like this one. But the most interesting twist comes in the one-two punch of tax reform, which will also benefit American consumers to the tune of $1,182 per family according to internal Republican estimates. While that’s not enough to pay for a two-week vacation, it is enough to help fuel a bit more discretionary spending on things like the down payment on a used SUV.

Home Depot

Housing stocks have taken a hit on word that the cap on the mortgage-interest deduction could be rolled back from $1 million loans to $500,000. But let’s get real: That is a tax break for the wealthiest homeowners, not for the typical Americans. Most middle-class families buying an existing home won’t be affected.

So while builders making million-dollar McMansions may not like it and are lobbying against that provision, Home Depot HD will be doing just fine, and particularly so if the GOP promise of putting more discretionary income in the pockets of those middle-class homeowners holds true.

More importantly, Home Depot will benefit doubly if there’s the promised reduction in the corporate tax rate. The company is almost exclusively U.S.-based, with roughly 2,000 domestic stores, and as a result doled out $3.87 billion in federal taxes last year for an effective tax rate of roughly 36%.

A reduced tax bill would add up for Home Depot stockholders, both as bigger profits and in more capital to fuel dividends, which have jumped about 300% in the last decade.

Apple

It’s easy to like Apple AAPL at any time, but that’s particularly true now. The company just put up a stellar quarterly report, beating Wall Street forecasts on iPhone sales and subsequently on both its top and bottom line.

Don’t let the earnings overshadow the big potential tax reform may have as a catalyst for the stock, however. After all, Apple is the king of corporate cash with a massive stockpile of some $270 billion in capital — but as has been widely reported over the years, more that $9 out of every $10 is actually overseas and subject to repatriation taxes for many uses.

As details emerge on the Republican tax reform bill, a tax break for overseas cash is still very much a possibility. And while the GOP may claim that the purpose of this move is to favor research and hiring at home, the reality will assuredly be that a massive portion is swept directly to shareholders in the form of buybacks and dividends.

With the most cash overseas, Apple clearly stands to benefit the most if and when this happens.

Verizon

Verizon VZ reported a roughly 35% effective tax rate in fiscal 2016. That makes it a great potential beneficiary of tax reform because it is among the most highly taxed corporations on Wall Street right now.

But it’s not just the prospect of a lowered corporate tax rate that makes the stock appealing. Thanks to a pro-business environment in Washington, Verizon is finally making headway in a quest to undo “net neutrality,” and throttle website traffic as it sees fit based on specific business needs —- a particularly important factor given its recent acquisitions of both AOL and Yahoo.

As a citizen and internet junkie, I find the prospect quite appalling. But as an investor, it’s hard to argue that a hands-off FCC may very well let Verizon get its way despite public opposition. That, coupled with a lower corporate tax rate, could really make a big difference for a company that otherwise is struggling to find growth.

Kinder Morgan

Kinder Morgan Inc. KMI is a nearly $50 billion umbrella company that runs one of the largest energy infrastructure networks in America. The company paid an effective federal tax rate of 35% in 2016. Like Verizon and other highly taxed corporations, it would love to see a tax plan that cuts that rate in the future.

Like Verizon, Kinder Morgan also is hoping for a favorable regulatory environment to pay off. The company owns an interest in 84,000 miles of natural gas and oil pipelines across America — enough to circle the planet 3½ times — and looser environmental restrictions on construction of these pipelines will naturally benefit Kinder Morgan as the leader in the space.

The stock has underperformed in 2017 in part because of debt concerns, but less money going to the taxman could ease that burden. Furthermore, investors have been worried that cash flows can’t support significant dividend increases, but having more money in its pocket would allay those concerns, too.

Article originally published by Jeff Reeves at marketwatch.com