Finally. It’s done. After months of speculation, tax reform has been completed. Now, analysts can get to work determining exactly how the new rules will affect various companies. It is almost certain there will be winners and losers. In all likelihood, the winners will outnumber the losers.
That is generally bullish for the stock market trading. If there are more winners than losers, that means we should expect the overall level of earnings of publicly traded companies to rise. Rising earnings should lead to higher share prices.
But, the details will require more analysis. In general terms, the corporate income tax rate will be lower. The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%. This means some companies will pay more and others will pay less.
Other significant changes include the repeal of the corporate alternative minimum tax, a tax that was designed to ensure all corporations paid at least something in income taxes. This simplifies the tax code and is a sign that the reforms are aimed at reducing costs for businesses.
Other changes include limiting the deductibility of interest for smaller companies and changes to the ability to benefit from carrying over net operating losses. These, and other changes, may affect small cap companies or micro caps but likely to have no effect on most publicly traded companies.
A Sector by Sector Review of the Potential Impact
Some analysts have already produced initial estimates. There is some agreement that the new rules will have different effects on different sectors. Analysts expect consumer goods to most likely be the biggest winner under tax reform.
Barclays has estimated that 2018 earnings per share for all publicly traded companies will be increased by an average of 6.3 %, with the increases ranging from just about 1% for the real estate sector to an estimated 11.9% for the consumer staples sector.
The expected impact on various sectors is shown in the chart below.
Looking for Individual Winners in the Sector With the Biggest Benefit
We used Barclays’ research as a starting point to develop a screen for stocks that are in the consumer goods sector. We also wanted the stocks to be cheap stocks with profits since income tax benefits depend on having income.
We focused on cheap stocks because those are the type of stocks that tend to deliver the largest gains in the shortest amount of time. Low priced or cheap stocks are often on the list of the biggest gainers in any individual quarter.
Then, we limited the list of potential buys to companies that have reported a profit in the past year and are expected to be profitable in the next year.
One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions. An example is shown below.
This screen used the criteria listed above to identify five stocks.
Amira Nature Foods Ltd. (NYSE: ANFI) is involved in processing, sourcing, and selling packaged Indian specialty rice. The company provides various types of basmati rice, other specialty rice and other food products, ready-to-eat snacks, edible oils, and organic products for retailers under the Amira brand; and non-basmati rice.
The company also sells bulk commodities, including wheat, barley, legume, maize, sugar, soybean meal, onion, potato, and millet products to trading firms. Products are sold to buyers in the Asia Pacific, Europe, the Middle East, North Africa, and North America; and distributors and retail chains in India.
The chart below shows ANFI has been in a persistent down trend but appears to have found support and could rally from here.
China Automotive Systems, Inc. (Nasdaq: CAAS) manufactures and sells automotive systems and components in the People’s Republic of China, the United States, and internationally. It produces rack and pinion power steering gears for cars and light duty vehicles; integral power steering gears for heavy-duty vehicles; power steering parts for light duty vehicles; sensor modules; automobile steering systems and columns; and automobile electronic systems and parts.
The company is also involved in the marketing of automotive parts in North America, as well as the provision of after sales, and research and development support services. In addition, it imports and sells automotive parts in Brazil.
CAAS is expected to report earnings per share (EPS) of more than $0.80 per share both this and next and trades at less than 6 times expected earnings.
Coffee Holding Co., Inc. (Nasdaq: JVA) manufactures, roasts, packages, markets, and distributes roasted and blended coffees in the United States, Canada, Australia, England, and China. The company offers wholesale green coffee products, which include unroasted raw beans of approximately 90 varieties that are sold to large, medium, and small roasters, as well as to coffee shop operators. It also roasts, blends, packages, and sells coffee under private labels.
Its coffee brands include Cafe Caribe, Don Manuel, S&W, Cafe Supremo, Via Roma, IL CLASSICO, and Premier Roasters.
The chart pattern below is bullish with a base forming at a higher low.
Virco Mfg. Corporation (Nasdaq: VIRC) engages in the design, production, and distribution of furniture for the commercial and education markets in the United States.
The company provides administrative office furniture, including desks, returns, bookcases, storage cabinets, and other items, as well as wardrobe tower cabinets, file credenzas, and mobile pedestals; laboratory furniture comprising steel-based science tables, table bases, lab stools, and wood-frame science tables; mobile furniture, including mobile tables for cafeterias, mobile cabinets, and mobile chairs for school settings and offices; and handling and storage equipment, as well as manufactures stackable storage trucks.
It serves educational institutions, convention centers and arenas, hospitality providers, government facilities, and places of worship through its sales and support teams, as well as a through a dealer network.
The company is expected to report EPS of $0.29 this year and $0.39 next year. Traders could consider waiting for an upside breakout before buying this stock.
Xcel Brands, Inc. (Nasdaq: XELB) designs, produces, licenses, markets, and sells branded apparel, footwear, accessories, jewelry, home goods, and other consumer products; and acquires consumer lifestyle brands, including the Isaac Mizrahi brands, the Judith Ripka brands, the H Halston brands, the C Wonder brand, and the Highline Collective brand, as well as manages and designs the Liz Claiborne New York brand.
The stock price has been volatile which means this could be best for traders who are comfortable buying at support and selling at resistance.
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