The tax reform package continues to wind its way through Congress, with the next step being reconciliation between the Senate and the House versions of the bill. There should be more time to focus on this now that a two-week government funding extension has been agreed to, averting any potential government shutdown for the time being.
My guess is that the reconciliation will lean toward the Senate version, given that Republicans can only afford lose one Senator's vote in order to get the final version passed and on President Trump's desk to sign before Christmas.
Because this is the most significant tax reform in 30 years, there are bound to be winners and losers. One big winner seems to be Silicon Valley.
Cowen & Co. just came out with a projection that the tax package will boost earnings per share by 8% in 2018 at both Alphabet (GOOGL) and Facebook (FB) . Amazon (AMZN) is expected to see a much bigger boost of 24%. The rich do seem to be getting richer. This should take the sting out of recently seeing "net neutrality" reversed by the Trump administration.
Meanwhile, homebuilders, especially those without much debt, should benefit tremendously from any tax reform that is signed. Their effective tax rate will likely drop substantially, and the potential loss of R&D credits has no impact on the sector.
The cap on mortgage interest deduction will likely only be a minor headwind, especially if it is $500,000 once the tax bill is reconciled. This will primarily affect high-end builders such as Toll Brothers (TOL) and possibly builders that develop a lot of "second homes" where the mortgage interest deduction will be potentially dropped completely. However, in my view, these small impacts will be offset in full by a strong job market, improving economic growth prospects and still historically low interest rates.
Smaller builders outside the ultra-luxury segment should continue to do well as the housing market continues to slowly recover after a decade of significantly below long-term trend housing starts.
My favorite homebuilder, LGI Homes (LGIH) , whose stock has almost tripled since I started profiling it less than two years ago, should continue to do well. The average selling price of its homes is just over $200,000, so the potential mortgage interest cap is likely to have no effect on the LGI's prospects. In addition, the homebuilder continues to post impressive growth.
LGI Homes posted better-than-expected earnings when it delivered third-quarter results one month ago. Management also lifted full-year earnings guidance substantially, moving to range of $4.75 to $5.25 per share from a range of $4.25 to $4.75.
In November, LGI closed on 534 homes, compared with 321 from the same period a year ago. For the year, home closings are up over 35%. In short, I expect LGI Homes to continue to deliver for shareholders.
Finally, I think the energy sector will be another "winner" from tax reform, especially the small and mid-cap domestic-focused players. One thing is for certain: passage of the tax reform package should ensure earnings growth, which is already solid, will pick up another tailwind in 2018.
This commentary originally appeared on Real Money Pro on Dec. 8. Click here to learn about this dynamic market information service for active traders.