Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code

Dec 8, 2017 @ 2:16 pm

By John Waggoner

Taxpayers aren't the only ones scrambling to figure out how tax reform will affect them. Wall Street is looking hard at which stock sectors the new law — however the final version is configured — will benefit most.

The maximum corporate tax rate in the U.S. is 35%. The tax reform bills in Congress would cut corporate taxes to 20%. Dueling versions of the Tax Cuts and Jobs Act still need to be reconciled in the House and Senate before a final bill is sent to President Donald J. Trump.

And for that reason, Joseph Shaposhnik, lead portfolio manager at the TCW New America Premier Equities Fund (TGUSX), thinks the bill's impact hasn't been entirely reflected in stock prices. "The market is about halfway through incorporating the bill through stock prices," Mr. Shaposhnik said.

S&P Global Market Intelligence agrees. "Wall Street analysts' consensus expectations for 2018 S&P 500 earnings have not really moved all that much, and certainly have not gone up at all, even though the prospect of corporate tax rate reductions have improved tremendously over the course of 2017," the company said in a note to advisers. "Each 1% decrease in the effective U.S. corporate tax rate adds $1.44 directly to bottom-line earnings-per-share of aggregate S&P 500 profits. This means that a conservative 5% net reduction in the U.S. effective corporate tax rate would boost 2018 S&P 500 earnings growth to 16.3% from 10.7% currently."

The trick to finding the biggest beneficiaries of the bill is to look for those sectors that pay the highest rate or have significant cash overseas and have growth opportunities to invest in with their new-found wealth.

One example: Food companies. "Many of these companies pay a full U.S. rate," Mr. Shaposhnik said. One favorite in his fund's portfolio is Conagra. "It's innovating, adding organic lines, adding innovative packaging and higher-quality ingredients to foods to deliver more value." Mr. Shaposhnik said.

U.S. conglomerates are another sector that will likely benefit from the bill. Berkshire Hathaway (BRK.A), for example, has a substantial deferred tax position on its balance sheet, Mr. Shaposhnik said, and it also holds a large position in railroads, another high-tax industry. The insurance side of Berkshire has been hurt by this year's natural disasters, making the stock relatively cheap, he said.

Industrial stocks and chemicals are also high-tax companies and will also be boosted by the tax bill, thanks in part to provisions that would accelerate depreciation. They would also gain if Congress passes an infrastructure spending bill.

"Both parties seem interested in an infrastructure bill," Mr. Shaposhnik said. "There seem to be reasonable odds for passing it." A great deal of wrangling lies in front of such a bill: Congress has to decide what counts as infrastructure, and how to pay for it.

The one industry that might not profit from the tax bill: Technology. "Tech companies generally pay a low tax rate, and therefore are least positioned to benefit from a reduction in the corporate tax rate," Mr. Shaposhnik said.

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