Trump Gives Small Caps a Big Cash Boost in 2017

Kristin Orman By Kristin Orman, Research Analyst, The Oxford Club

Market Trends

Trump promises to “make America great again.”

And in his first 100 days, he has also pledged to “make America rich again.”

How? He’s encouraging American companies to bring their cash back home with a tax holiday.

And he’ll keep it here by implementing the biggest corporate tax cut in more than 30 years.

This double whammy is setting investors up for “once in a lifetime” profit opportunities.

But not all stocks will benefit equally. Here’s where to look for triple- or even quadruple-digit gains…

Size Matters

In 2005, companies repatriated $300 billion during the tax holiday.

Around 80% of that total amount was used to buy back stock. But many companies also paid huge special dividends to their shareholders.

A number of these one-time payouts were 10 times or 20 times larger than a company’s annual dividend! (And in some cases, even greater than that.)

During the 2005 tax holiday, 85% of participating corporations were large companies with market capitalizations of more than $10 billion. Just 15% of participants were small or midsized.

But the biggest winners that year weren’t the big multinational companies that repatriated the largest amounts of cash…

In fact, the opposite was true!

What the small and midsized companies lacked in market cap, they more than made up for in returns…

In fact, they outperformed their larger counterparts by an astronomical 1,438%.

But here’s where it gets even better: The smallest companies had the bigger returns. Small cap stocks returned more than 14 times what the big boys did that year.

And this year, that outperformance could be even more impressive.

Today, there’s $2.5 trillion sitting offshore – more than six times the amount repatriated in 2005.

With that kind of money pouring back into the U.S., I wouldn’t be surprised to see large companies jump an average of 10% to 20% in 2017.

Many small and midcap companies will easily soar hundreds of percent.

I’ve identified several of these small companies that are holding significant portions of their cash overseas. And on Monday, I’ll explain why these particular few present the most lucrative investment opportunity I’ve seen in years.

In the meantime, it’s important you understand that Trump’s tax holiday isn’t the only force that’ll drive small and midcap stocks up this year.

Roll Back Taxes and Crank Up Profits 

Trump’s tax cuts will also propel margins, profits and stock prices higher.

We’ve seen it happen before. In 1986, Reagan’s Tax Reform Act axed the corporate tax rate from 48% to 34%. Ten months later, the Dow was up 38%.

Lower taxes lead to higher corporate profits and higher stock prices.

This time around, Trump wants to cut the corporate tax rate from 35% to 15%. When he does, stock prices are going higher.

Tax cuts often have the biggest impact on the profits of small companies. That’s because small cap companies often pay the highest corporate tax rates on their profits.

To put it into perspective, members of the Russell 2000 pay, on average, 32% in taxes. S&P 500 companies pay just 26%.

The taxes paid by smaller companies tend to be higher because most of their sales come from the U.S. They have fewer profits to shield from U.S. taxes overseas.

For example, Papa John’s (Nasdaq: PZZA) paid an income tax rate of 31.2% in 2015. Domestic sales made up 93.6% of the $1.6 billion in revenue the company generated that year.

On the other hand, biotech multinational Amgen (Nasdaq: AMGN) paid a 2015 tax rate of just 13.0%.  More than 20% of its $21.7 billion in sales comes from outside of the U.S.

So a reduction in the corporate tax rate, even just 10%, makes a huge impact on small companies’ bottom lines.

And when their profits immediately head higher, their stock prices will, too.

Music to Mr. Market’s Ears

As the saying goes, history doesn’t always repeat itself, but it often rhymes. And Trump’s first 100 days will have investors singing a happy tune.

A tax holiday and corporate tax cut could result in historic gains for stocks.

But as I said, they aren’t the only policies that will drive the market higher over the next 100 days.

Marc has uncovered several key Trump promises that will present a huge windfall for investors in the next three months. He’s revealing them, LIVE, in an invitation-only webcast hosted by The Oxford Club on January 19.

If you’re not yet on the list, RSVP to this FREE event immediately – seats are limited.

Trump’s moneymaking catalysts are emerging rapidly. So don’t miss out… 2017 could be your portfolio’s best year ever.

Good investing,

Kristin