Overview: The Trump trade commentary provided by Citigroup this past week focused largely on the repatriation portion of the proposed tax plan — most notably what the windfall of cash would mean for share buybacks.
In short, it would be very positive for repurchases, which have helped keep the eight-year bull market afloat by generating share gains even during periods devoid of strong fundamentals. For evidence of that, look no further than the chart above, which shows the relative outperformance of companies heavily involved in buybacks.
Citigroup estimates that US corporations are holding a whopping $2.5 trillion of cash overseas.
Top recommendation: Buy stock of the companies with the most cash stashed overseas, because they're the ones with the most to spend on highly-lucrative share buybacks.
Bank of America Merrill Lynch
Overview: A big part of Bank of America Merrill Lynch's Trump trade analysis focuses on small-cap companies tracked by the Russell 2000 index. The firm notes that small caps, which are more domestically focused, soared after the election on expectations that the president would pass pro-US business policies. BAML also highlights the fact that these same stocks have since dropped considerably, reflecting a mounting lack of confidence.
With these stocks now sitting at a discount to the rest of the market, the firm has a couple of options trades they see as an effective hedge to further downside, should tax reform actually take hold.
And, as with the Goldman charts above, you'll note that the small-cap Trump trade has recovered slightly over the past few weeks.
Top recommendation: Purchase bullish call contracts on Russell 2000 options, relative to their S&P 500 counterparts, as a tax reform hedge.
Overview: While JPMorgan shares Goldman's view that highly-taxed companies will benefit from the expected tax reform, it's also watching closely for the immediate expensing of capital expenditures (capex). If that were to go into effect, it would benefit asset-heavy industries, most notable energy and industrial companies.
In terms of the previously-mentioned lowering of corporate taxes, JPMorgan estimates that if the statutory tax rate is cut just 10 percentage points to 25%, that would boost the S&P 500's earnings per share by $11.40 to $143.40. That, in turn, would add more than 150 points to the index, which is fresh off a series of record highs.
And with the stock market serving as a handy signaling device for the likelihood of policies being introduced, JPMorgan also sees areas of the bond market vulnerable to new the repatriation portion of the tax plan.
"Tax reform that repatriates foreign cash and eliminates interest deductibility would greatly reduce US corporate bond supply and should thus on net tighten credit spreads," analysts led by Jan Loeys, the firm's head of global asset allocation, wrote in a recent client note.
Buy stocks of companies paying high taxes
In the event of immediate capex expensing, buy stocks of companies in asset-heavy sectors like energy and industrials over those in asset-light sectors
Keep an eye on the potential for tighter credit spreads
Overview: The second big component of the expected tax plan, a repatriation tax holiday, would incentivize multinational companies — who make a large portion of their earnings overseas — to bring cash held internationally back into the US.
The chart above shows another Goldman index containing the stocks with the highest overseas earnings. After losing their post-election gains, they recovered before spiking in recent weeks on increased policy optimism.
The firm estimates that a lowering of the tax would result in multinational corporations repatriating $250 billion of a possible $920 billion untaxed overseas cash in 2018. In terms of the specific sectors that stand to benefit most, Goldman highlights tech and healthcare, which combine for roughly 85% of the total overseas cash for S&P 500 companies.
Top recommendation: Figure out which companies hold the most cash overseas, then buy their stocks and don't look back. Large-cap tech and healthcare are a good place to start.
Goldman Sachs, part 1
Overview: The chart above shows a Goldman-curated basket of 50 companies that pay high taxes, spread across a variety of US industries.
After a post-election surge, the index saw all of its gains relative to the broader market erased by mid-March. Now, amid rising optimism around some sort of tax cut, it's been ticking up in recent weeks.
Top recommendation: Figure out which companies pay the most taxes, then buy their stocks and don't look back.