As Congress prepares to vote on a final tax reform bill, analysts at JPMorgan Chase & Co. (JPM) have published a top 10 list of stocks that should, in their opinion, be the biggest beneficiaries. In fact, CNBC reports, these analysts also considered other policy initiatives from President Trump and Congressional Republicans, such as deregulation, that should have positive impacts on corporate profits and stock prices. Overall, JPMorgan's head of U.S. equity strategy, Dubravko Lakos-Bujas, tells clients that corporate tax cuts will create a "goldilocks" environment for stocks, per CNBC. (For related reading, see: Trump's Tax Reform Plan.)
The Top 10
JPMorgan screened for companies with high tax rates, large domestic sales and significant pricing powers. Their top 10 picks to win from tax reform, with their 52 week price moves as of the close on Monday, and forward P/E ratios per Thomson Reuters data reported by Yahoo Finance, are:
- CBOE Global Markets Inc. (CBOE): +68%, 31x
- CSX Corp. (CSX): +46%, 20x
- Intuit Inc. (INTU): +35%, 29x
- Hilton Worldwide Holdings Inc. (HLT): +36%, 34x
- Southwest Airlines Co. (LUV): +29%, 15x
- M&T Bank Corp. (MTB): +11%, 17x
- KeyCorp (KEY): 9%, 13x
- L Brands Inc. (LB): -16%, 18x
- Marathon Oil Corp. (MRO): -19%, -117x
- Devon Energy Corp. (DVN): -20%, 17x
Over the same 52 weeks, the S&P 500 Index (SPX) was up 18%. Its forward P/E as of December 15 was 20x, per the weekly calculation by Birinyi Associates reported by The Wall Street Journal.
Marathon has a negative P/E ratio since the consensus forecast calls for a loss of 13 cents per share in 2018. However, the company has positive cash flow from operations, per Yahoo Finance.
Overall Earnings Boost
JPMorgan estimates that cutting corporate taxes will add about $10 to S&P 500 EPS in 2018 and 2019, raising their estimates to $153 and $165, respectively, per CNBC. The reconciled bill that came out of a conference between members of the House and Senate, and which should be voted on this week, reduces the top corporate rate to 21%. Driven by increased after-tax profits, Lakos-Bujas forecasts a value of 3,000 for the S&P 500 in 2018, up 11% from today, per CNBC. (For more, see also: 4 Best Tech Stocks to Own in 2018: Fortune.)
'Highest Conviction' for Financials
Meanwhile, Lakos-Bujas told CNBC, "Financials is our highest conviction overweight." More specifically, he sees profit enhancement for banks and other financial sector firms from expanding net interest margins as interest rates rise, as well as decreasing credit costs due to a strong labor market with falling unemployment and some wage growth. Financial sector firms on JPMorgan's list are the CBOE, the parent of the Chicago Board Options Exchange, along with M&T Bank and KeyCorp.
L Brands is an apparel retailer that owns Victoria's Secret, Bath & Body Works and Henri Bendel. Intuit develops and sells business, accounting and tax preparation software, such as QuickBooks and TurboTax.