Dec. 16, 2016, 8:40 a.m. EST

S&P 500 companies would save $87.1 billion if Trump passes his tax plan

The president-elect realistically could lower the corporate tax rate to 20% from 35%

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By Michael Brush, MarketWatch

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Stocks that should benefit

Whatever happens to the market, it’s pretty clear there will be some big winners among companies — or those paying the highest tax rates. Finding the companies that benefit the most is not nearly as simple as running a screen for those that pay the highest tax rates, and then going out for a beer to celebrate. There are several pitfalls, as I learned when I did this for you. Here they are, in case you want to hunt for high tax paying companies on your own.

  • First you have to eliminate the companies that pay stupid-high tax rates. In screens run for me by S&P Global Market Intelligence, over 100 companies paid tax rates of more than 60% last year — including Avon Products Inc. , which tops the list with a tax rate of 3,609%. Obviously something unusual is going on with these companies that distorts their tax picture. You can spend hours drilling down on them to try to figure it all out. Or you can just make things easier and clean up your short list by cutting them out. That’s what I did.

  • Next, you have to drill down to see where companies pay taxes. Oil States International Inc. /zigman2/quotes/200852543/composite OIS +1.65%  looks like the perfect candidate to benefit from Trump tax cuts, since it pays a high tax rate of 43.9%, according to S&P Global Market Intelligence. That puts it right in the sweet spot to benefit from a tax cut — not too high but higher than most. However, it actually pays most of its taxes abroad. So any Trump tax cut won’t help much. (The word “international” in the company name, of course, was a helpful clue.)

The bottom line here is that if you want to do this on your own, be sure to check where companies pay taxes. You can find this in the annual report footnotes, typically about two-thirds of the way through the notes, which are at the bottom of the 10-K filing.

Here’s another head fake. Companies such as Party City Holdco Inc. /zigman2/quotes/209141609/composite PRTY -13.95% , Rowan Cos. and Wendy’s Co. /zigman2/quotes/204070192/composite WEN +3.01% look like they will gain a lot from the Trump tax cut, since they pay tax rates of around 40% or more. But their balance sheets reveal gobs of debt. This could be a problem because Trump and House Speaker Paul Ryan have suggested they may want to reduce tax deductions for interest, says Puglia. So while those three companies would gain from a tax cut, they might lose on the interest-rate deduction side of things.

The main takeaway

The best companies to look for are those that pay high tax rates in the upper-30% to lower-40% range. This means they’re probably paying the full 35% federal tax. (The rest is state, local and foreign taxes.) Consider favoring companies that have little to no debt. And look for ones that do most of their business in the U.S. That means most of their tax is paid in the U.S., too, and not abroad where Trump can’t change the tax rate.

“Look for simple companies that run simple businesses,” says Brian Peery, portfolio manager at the Hennessy Funds. “Look for pure-play U.S. companies with tax rates in the 40% range. That is really where you are going to see some huge incremental benefits.”

Here are several companies that stand to benefit the most from any Trump tax cuts because they pay high tax rates, they pay a lot of tax compared to their market cap, they have relatively low debt, and they pay most or all of their tax in the U.S. (For an extended list of companies that may benefit, please see more complete lists at my website .)

Asset managers

These companies not only typically pay high taxes and have low debt, they’ll get a boost from any market jump from tax cuts, because they manage money. That will increase the fees they get based on the amount of money they manage.

Companies that rank high for taxes paid in this group include: Cohen & Steers Inc. /zigman2/quotes/209415891/composite CNS +2.09%  at 42.9%, WisdomTree Investments Inc. /zigman2/quotes/206727313/composite WETF +3.51%  at 41.6%, T. Rowe Price Group Inc /zigman2/quotes/203200152/composite TROW +0.80% at 38.9%, Waddell & Reed Financial Inc. /zigman2/quotes/209073998/composite WDR +1.99%  at 38.5%, and the investment bank Houlihan Lokey Inc. /zigman2/quotes/204145582/composite HLI -0.43% at 44.5%. Exchanges fit into this, too, including CME Group Inc. /zigman2/quotes/210449693/composite CME -0.15% , which pays a tax rate of 36.3%, and BATS Global Markets Inc. at 40.7%.

Retailers

Lots of retailers and consumer companies come up with very high tax rates. They already stand to benefit because of rising wages, low unemployment and increasing consumer confidence. A tax cut would help them even more.

The ones in this group with lower debt levels and higher tax rates include Hershey /zigman2/quotes/202765576/composite HSY +0.55% which has a 43.1% tax rate, Under Armour Inc. /zigman2/quotes/208967132/composite UA +5.09%  at 39.9%, Home Depot Inc. /zigman2/quotes/208081807/composite HD -0.48%  at 36.4%, CVS Health Corp. /zigman2/quotes/209664499/composite CVS +0.11%  at 39.3%, Lowe’s Cos. /zigman2/quotes/205563664/composite LOW -0.79%  at 42.4%, TJX Cos. /zigman2/quotes/203136811/composite TJX +1.08%  at 37.7%, Best Buy Co. Inc. /zigman2/quotes/205918291/composite BBY -0.76%  at 38.4%, Advance Auto Parts Inc. /zigman2/quotes/202065737/composite AAP +0.34%  at 37.1%, Whole Foods Market Inc.   at 38.7%, Dick’s Sporting Goods Inc. /zigman2/quotes/200566298/composite DKS +1.11%  at 37.8%, Tile Shop Holdings Inc. at 41.4%, Chipotle Mexican Grill Inc. /zigman2/quotes/200781108/composite CMG +4.38% 38.2%, and Monster Beverage Corp. /zigman2/quotes/205899417/composite MNST +0.95%  at 38.7%.

Airlines

Here, high-tax and low-debt companies include Southwest Airlines Co. /zigman2/quotes/201071949/composite LUV +4.74%  at 37.3%, Spirit Airlines Inc. /zigman2/quotes/205782179/composite SAVE +7.80% at 36.9%, and SkyWest Inc. /zigman2/quotes/205631497/composite SKYW +3.06%  at 39.4%.

Small-cap companies

Lots of smaller companies stand to benefit because they have simpler businesses with fewer deductions and high tax rates since they can’t afford expensive tax attorneys, says Bruce Bittles, chief investment strategist at Baird. So Trump’s tax cuts could help them a lot, and contribute to recent strength in this group.

Here, companies with relatively low debt levels and high tax rates levels include Pegasystems Inc. /zigman2/quotes/209653101/composite PEGA +1.12%  at 40%, Inovalon Holdings Inc. /zigman2/quotes/201325530/composite INOV +1.86% at 42.4%, Semtech Corp. /zigman2/quotes/206723451/composite SMTC -1.13% at 43.6%, Netgear Inc. /zigman2/quotes/204742131/composite NTGR -0.74% at 43.2%, Taser International Inc.  at 43.6%, and Shutterstock Inc. /zigman2/quotes/202296017/composite SSTK -2.08% at 43%.

Oh, the headaches

While a big tax cut could boost investor profits, it would not be all smooth sailing. A huge problem is that a big tax cut would mean new earnings and valuation numbers are incomparable with historical data. “This will make comparisons with prior years almost meaningless,” says Meyer, at Bastiat Capital Funds.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested LUV and TASR in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.

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Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

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