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russell 2000 tax reform

‘Stock Pickers Rejoice!’ Goldman Tells You Where To Find The Tax Bill Winners

"Now you've got a fun activity for the holiday weekend. Assuming your idea of Christmas fun is sorting the Russell 2000 for tax cut beneficiaries." 

Ok, so it’s official:

  • TRUMP SIGNS REPUBLICAN-BACKED BILL TO OVERHAUL U.S. TAX CODE

We’d be remiss if we didn’t remind all of our middle class readers that this means you’re screwed – or at least you will be over time. On the off chance you haven’t read it yet, the implications of this across income groups can be found here.

Ok, but leaving aside the fact that this will never pay for itself (i.e. it will balloon the deficit) and the even more inconvenient fact that it will exacerbate income inequality (see Ray Dalio’s latest), the discussion continues on exactly what it means for markets.

 

On Thursday, Wells Fargo (which, according to Goldman’s estimates, will itself be one of the biggest bank beneficiaries) was out upping their S&P target based on the tax bill. Well to close out the week, Goldman has released a new note suggesting that “stock pickers should rejoice.”

Why should stock pickers “rejoice”, you ask? Well apparently because there are some opportunities to be had among small-caps. Here’s Goldman:

The Russell 2000 outperformed sharply post-election and acted as an index-level proxy for tax reform odds for most of 2017. However, it has barely outperformed the S&P 500 in recent weeks. Although small-caps tend to pay higher effective tax rates and are typically more domestic-facing than large-caps, the Russell 2000 has been hampered by the risk posed by limiting interest deductibility as well as the fact that nearly one-third of index constituents have zero or negative pre-tax income, and therefore would reap little benefit from the rate cut.

Russell

Ok, so the enterprising among you might come to the conclusion that given everything said in that excerpt, drilling down into the Russell might reveal some compelling opportunities. If that’s what you think, Goldman thinks you’re thinking like they’re thinking. To wit:

A list of 103 potential tax reform beneficiaries within the Russell 2000 has actually underperformed the broad S&P 500 since the start of December by 100 bp as the likelihood of tax reform rose and our S&P 500 High Tax basket outperformed. These stocks, which have many of the same qualities that have outperformed among large-caps, suffered en masse with their index constituent peers as investors moved away from the Russell 2000 index as a “tax trade.” Now they represent opportunities for investors willing to sift through the chaff.

Russell2000Benefit

The rub there is that you don’t get the list, but what you do get is the criteria: high effective tax rates and domestic sales, low interest expense relative to EBIT, and low DTA.

That shouldn’t be too hard to screen for. Now you’ve got a fun activity for the holiday weekend. Assuming your idea of Christmas fun is sorting the Russell 2000 for tax cut beneficiaries.

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10 comments on “‘Stock Pickers Rejoice!’ Goldman Tells You Where To Find The Tax Bill Winners

  1. blockdesk.com will, for a very reasonable price, any day tell you precisely which stocks most likely have price gain prospects in the next 3 months, and at what coming price you should take the money and run. find out more, anonymously, at http://www.blockdesk.com.

  2. using finviz.com small cap+US+high net profit margin+ under 50% lt debt/equity gives a lot of small cap financials, small banks….?

    • and why does that not make sense?

      • theyre always the ones loaded up on local sweet heart ‘i know a guy’ type of deals to the local bigwigs (relatively speaking). my memory is, some do well, some totally step in it during late cycle. i do have a signif bias against banks ingeneral though, it was pulling teeth to overweight xlf this fall, still have tight stop on it. banks and airlines, over time, are net money losers….neither industry is consistenly profitable, but both rely on massive amounts of ‘capital’.

  3. Heis,
    Where were you when Pres Obama and team raised nat debt from 10 to 20 trillion? This new tax plan will Be net neutral at worst and most likely net positive. We all get ” a piece of the pie.”
    Ed

    • Ed you are drinking the kool-aid my friend and clearly nothing is going to stop you.

      but the bottom line here is that this is not “net neutral.” it is $1.5 trillion worth of not net neutral. it is not going to pay for itself with growth. literally no one believes that except for the people who are selling this to you. additionally, unless you are in the top income quintile (which you may be), your taxes are going to go up, likely starting in 2025 and surely by 2027. that’s just the math, Ed. you can pretend like that math isn’t real if you like, but it won’t change the numbers.

      • Heis,
        Our disagreement over the figures has much to do with the CBO scoring (GIGO). I don’t think they can use dynamic scoring therefore they can’t project any increase/decrease in revenue or expense. With this political system, I think looking out beyond this president’s current term and accepting any CBO math for 2025/2027 is folly. 2nd- once the Fed Gov’t extends it benevolence to the huddled masses it rarely takes it back. Anyhow, that’s my thoughts and I’m sticking to them, Appreciate you time!
        Ed

  4. After screening for your picks, better take a careful look at those companies sitting on a pile of deferred tax on the asset side of the balance sheet. They may still be solid companies with great growth, but a significant equity write-down will hit next year.

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