Big beneficiaries of tax reform may include Schlumberger NV (SLB), Target Corp. (TGT), AT&T Inc. (T), Wells Fargo & Co. (WFC), The Hershey Co. (HSY), Hormel Foods Corp. (HRL) and Dr. Pepper Snapple Group Inc. (DPS), according to CNBC. These picks were offered by David Katz, president and chief investment officer of Matrix Investment Advisors Inc., and Chad Morganlander, portfolio manager at Washington Crossing Advisors LLC, a division of Stifel Financial Corp. (SF).
The year-to-date price changes in these stocks through December 1, and their current forward P/E ratios are:
- Schlumberger: -22%, P/E 30
- Target: -15%, P/E 15
- AT&T: -11%, P/E 13
- Wells Fargo: +5%, P/E 13
- Hershey: +10%, P/E 22
- Hormel: +8%, P/E 22
- Dr. Pepper Snapple: +1%, P/E 19
Forward P/E data is from Thomson Reuters as reported by Yahoo Finance. By comparison, the S&P 500 Index (SPX), up 17% YTD, had a forward P/E of 20 as of December 1, as calculated by Birinyi Associate and reported by The Wall Street Journal.
David Katz's Picks
Katz's choices are oil services company Sclumberger, department store chain Target, telecom company AT&T, and banking giant Wells Fargo. CNBC notes that he is a value investor, and he likes all four companies even without tax relief, given that he sees improving earnings next year and finds that they all sell at "reasonable valuations." Nonetheless, they pay higher than average federal income taxes under current law, and Katz told CNBC that tax reform could boost their earnings by about 5% to 10%. (For more, see also: Prospects for Tax Reform.)
Chad Morganlander's Selections
Morganlander cites chocolate maker Hershey, meat processor Hormel, and soft drink maker Dr. Pepper Snapple as "growing, profitable, well-capitalized" companies that also are doing well even without tax reform, in his comments to CNBC. But they also have high average tax rates, he said, largely because about 90% of their revenues are generated domestically. As a result, tax cuts could improve their earnings significantly, as with Katz's picks. "Even without the tax break, we believe these companies can outperform the S&P 500 with considerably less volatility," he told CNBC.
Corporate Tax Changes
The tax reform bill passed by the Senate on December 2 would cut the top federal corporate income tax from 35% to 20%, the same provision as in the bill approved by the House. Both bills allow businesses to reduce taxable income by deducting 100% of most capital expenditures in the year that they are made, rather than through depreciation charges spread over a number of years. However, these provisions for accelerated tax writeoffs expire after five years.
On the other hand, both the House and Senate bills put limits on the deductibility of interest by corporations, and eliminate a variety of other business credits and deductions. Both bills also cut taxes on repatriated overseas cash and profits. The next step calls for members of both the House and Senate, chosen by the leadership in each body, to meet in conference, iron out the differences in the two bills, and write a new reconciled bill that will be voted upon by both chambers, CNN reports. (For more, see also: Trump's Tax Reform Plan.)