'Trump Stock' Rally Is Back on Track

 | Sep 21, 2017 | 1:00 PM EDT
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Is The Trump Trade Back?

You heard that right. What's old is new again, or in this case... what never was, might just be. While the President's approval rating has undeniably been rapidly improving in recent weeks, so has talk on Wall Street of renewed enthusiasm for what was known in the days after last November's election, as the "The Trump Trade." Remember that "Trump Stock" button that our pal, Jim Cramer, used on CNBC's Mad Money show back in December and January? Hope he still has a use for that button. So do a lot of traders.

What is pulling Wall Street back toward the President's original agenda? The catalyst is a newfound optimism on tax cuts. We are likely to hear more on what progress has been made in this space as soon as Monday. While certain aspects of the President's original policy outline, such isolationism, no longer seem realistic, the Republican-led legislature has become overtly aware of their precarious position should they not come up with a victory of some kind. What would be more popular with American people of all political persuasions than taking less of their hard earned money, or making it possible for the corporations that they invest in, and are employed by, to do much better?

Tax Cuts Like a Knife

Is Tax Reform likely this year? Probably not. Tax cuts? Now, you're talking. Whether this year or early next, this notion will provide the benefits of further improved sentiment almost immediately. Another delay, by say a health care debate, and... well, you know. But let's stay positive.

What firms benefit from a lower corporate tax rate? JP Morgan has estimated that cutting the statutory rate from the headline of 35% to 25%, which is still far higher than the President has insisted on, will boost S&P 500 earnings by more than $11 in 2018. Current aggregate projections for next year are running at about $145. This, in JP Morgan's view, adds about 150 points to the index from here, even if all other factors remain stagnant. 

 Guess what? That's great, but the firms that pay the highest net tax rate aren't in the S&P 500, they're in the Russell 2000. The small-caps for the most part pay very close to that 35% headline rate. The S&P 500 has run 12% on the year. The Russell 2000 far less, at about 6%.

Want to cherry pick your own small-caps, gang? Didn't think so. If you need help, the most popular exchange-traded fund tracking the Russell 2000 is the iShares Russell 2000 ETF (IWM) , with about $39 billion worth of total assets. Other ETFs tracking that small-cap index are the Vanguard Russell 2000 ETF (VTWO) , and the SPDR Russell 2000 ETF (TWOK) . All three of these are up close to 7.5% so far this year.

Repatriation

It is widely felt that part of any tax plan will be a one-time repatriation holiday for American corporations that have stashed overseas earnings to avoid high U.S. tax rates if brought home. It is also widely felt across the industry that we are talking about a potential of more than $2.5 trillion here. Why is that number unsubstantiated? We really don't know how much of that money is already here in the form of collateralized debt offerings that have been made by these firms in order to support corporate operations such as research and development, dividend payments, and the corporate repurchasing of shares in the secondary market.

Still, enough dough would come home. What would these firms do with a cash hoard if realized, here in the home market? Likely more of the same, which would reignite a share buyback business that has recently cooled. Who are we talking about here? Basically any firm that does a large slice of their business internationally. So, you are dealing now with the Dow Industrials, and at least the top half of the S&P 500, if not more. This distinction is important. 

Many of the benefactors are tech names. Apple (AAPL) accounts for more than 10% of that $2.5 trillion all by themselves. Lump in Alphabet (GOOGL) , Microsoft (MSFT) , Cisco (CSCO) , and Oracle (ORCL) , and voila! Now, we're at 25% of all cash stowed elsewhere. Sha-Bang.

Those are all pricey for the two-fisted kid trying to make a living in front of his or her computer. I've got one for you. Know what firm has nearly $100 billion stashed overseas, and in dollar terms is actually affordable for the retail investor? Drum roll please. Yes, the beleaguered General Electric (GE) . Game on. That stock could use the help. I know, I'm wearing them myself. Already has a decent dividend too.

Follow the Money

Oh, there's been no budget agreement as of yet. The debt ceiling has been pushed out, but we don't really know what the federal government is going to spend next year, and where they will draw those funds from. What we do know is where those funds are going to go. The President wanted fiscal stimulus. I think before we even think about an infrastructure build, we will see huge money spent on defense thanks to North Korea, Russia and never-ending terrorism. On top of that, you may have noticed these awful hurricanes that keep wrecking huge population centers across the nation.

Two things are certain. We are going to defend ourselves, and we are going to rebuild. You all know that I have long loved Kratos Defense (KTOS) , aka "the Drone Guys." That name has struggled through a secondary offering of late, but has benefited from the Northrop Grumman (NOC) takeover of Orbital ATK (OA) , as the big boys reach for growth in the "Space" space. Get it? Boeing (BA) has had such a run. I would never bet against them. There are also my favorites in the defense space, Lockheed Martin (LMT) , and Raytheon (RTN) , Don't forget General Dynamics (GD)  The world is a dangerous place. For me, looking these name over, I feel like a kid in a candy store. It's like throwing darts.

Summary

Gang, I could go on and on and on. I am already long many of these stocks, and I didn't even get into the rebuilding after the storms. Ideas there would be Owens Corning (OC) , Weyerhaeuser (WY) , United Rentals (URI) , Caterpillar (CAT) , and Waste Management (WM) , not to mention the home improvement retailers. Did we even get into the banks? Increased spending begets growth, which will justify higher interest rates. The financials have already been moving in recent days with a little help from their friend Janet Yellen.

The bottom line is how receptive congress is to realistically tackling tax reform. That is key to everything. The Trump trade getting back in motion, and Jim Cramer getting back to pounding that button on his show is what we all need. Then, we'll all be making some money, and sitting on annualized GDP of 4%. Huzzah.

(Here is some additional comment on the "Trump Trade" from TheStreet's Martin Baccardax)

 

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