Let's dedicate this Valentine's Day to President Donald Trump and his pro-growth policies that are highly anticipated to boost economic growth, increase inflation and flood companies with excess cash and earnings growth. It will also lead to a wave of buybacks, and mergers and acquisitions.
Trump has promised to spend big time on infrastructure, reduce regulations, cut corporate taxes and create more jobs in the country. In fact, the President has already acted on a slew of reforms including termination of trade agreements, travel ban, immigration curb, border tax and deregulation. All these have triggered risk-on trade, sending the major indices to new peaks several times since his election. Notably, the S&P 500 exceeded $20 trillion in market cap for the first time in its history (read: Welcome Trump Era with These ETFs ).
That being said, the majority of Americans are in love with Trump's series of executive orders so far, as per the new poll conducted by Politico and Morning Consult . Trump scored no less than a 46% approval for any of the orders. However, volatility persists as Trump lugs along risks of a trade war and political instability with its protectionist policies.
Given this, investors should consider ETFs and stocks that are the direct beneficiaries of Trump's reforms and could shower handsome returns. Below are some of these:
Small caps could arguably be better plays in the current environment, as these are safer and better positioned should any political or economic issue creep into the picture. Trump's massive stimulus policies will benefit small caps more as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. Being U.S. focused, a rising dollar will have negligible impact on these pint-sized companies.
Further, Trump is looking to tweak the North American Free Trade Agreement and build a Mexico wall that would favor small-cap stocks in case it results in a trade war or a tariff increase as feared (read: 5 Small Cap ETFs and Stocks to Play January & Trump Effect ).
Vanguard Small-Cap Value ETF VBR : VBR has returned about 11.9% over the past three months and touched its all-time high of $124.96 per share in the last trading session. The fund targets the small cap value segment and follows the CRSP US Small Cap Value Index. It holds a basket of 833 stocks with none holding more than 0.6% of assets. Financials dominates the portfolio at 31.3%, followed by industrials (20.5%) and consumer services (10.2%). The ETF is popular with AUM of $10 billion and trades in solid average daily volume of about 457,000 shares. It charges 8 bps in fees per year and has a Zacks Rank #2 (Buy) with a Medium risk outlook.
Brooks Automation Inc. BRKS : This Massachusetts-based company delivers automation solutions to the global semiconductor and related industries. The stock saw rising earnings estimate of 14 cents for this fiscal year over the past 90 days, representing growth of 105% year over year. It has a top Zacks Rank #1 (Strong Buy) with a VGM Style Score of B and boasts a solid Industry Rank in the top 5%. Brooks Automation hit a new 52-week high of $21.77 in the last trading session, representing a gain of 34% over the past three months.
Last week, Trump promised to announce a 'phenomenal' tax cut plan in coming weeks that reignited a post-election rally, which stalled on concerns over Trump's protectionist action and lack of clarity on policy reforms. Currently, the U.S. has the second highest statutory corporate tax rate of 35% in the world, trailing only Japan, which has a 39.54% tax rate. The President is seeking to slash corporate tax to as low as 15%. As per the Tax Foundation, Trump's tax reform would reduce federal taxes by $4.4 trillion to $5.9 trillion over a decade, increase GDP to 6.9-8.2%, and create 1.8-2.2 million jobs (read: Trump Tax Talk Boosts Market: Time for Momentum ETFs? ).
While most of the sectors in the S&P 500 stand to benefit from the tax reforms, consumer discretionary with the second highest effective tax rate of 31.4% (as per S&P Global data) will be the biggest beneficiary. In particular, the retail industry has a burden of higher taxes.
SPDR S&P Retail ETF XRT : This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket with none accounting for more than 1.44% of assets. Apparel retail takes the top spot at one-fourth share while Internet and direct marketing, specialty stores, and automotive retail round off the next three spots with a double-digit allocation each. The fund has amassed $286.6 million in its asset base and trades in heavy volume of 4.9 million shares per day on average. It charges 35 bps in annual fees and gained 2.2% last week on tax cut proposal. The product has a Zacks Rank #1 with a Medium risk outlook.
Dollar Tree Inc. DLTR : This Virginia-based company is an operator of discount variety stores offering merchandise at a fixed price point of $1.00 or less. The stock saw rising earnings estimate of 8 cents for this fiscal year over the past three months, representing growth of 61.6% year over year. It has a Zacks Rank #2 with a VGM Style Score of B and boasts a solid Industry Rank in the top 32%. The stock is modestly down 0.1% last week.
In early February, the President finally took action to roll back regulations in the banking and asset management sectors. He signed an executive order to dismantle the Dodd-Frank Act, which was enacted in the aftermath of the financial crisis and has crimped some of the business lines of the banks. The other order is to repeal the fiduciary rule slated for April, aimed at financial advisors to act in the best interest of their clients when providing retirement advice rather than seeking higher commissions for themselves.
Relaxing of regulations will undoubtedly increase profitability of companies, particularly banks, and boost dividends and buybacks (read: Will Trump & Fed Make 2017 a Year of Financials ETFs? ).
SPDR S&P Regional Banking ETF KRE : KRE surged 12% in the trailing three-month period and hit fresh high of $57.14 per share in the last session. It is one of largest and the most popular ETFs in the banking space with AUM of $3.5 billion and average daily volume of 6.8 million shares. The ETF tracks the S&P Regional Banks Select Industry Index, holding 101 stocks in its basket with none holding more than 3.8% of assets. It charges 35 bps a year in fees and has a Zacks Rank #1 with a High risk outlook (read: Top-Ranked Sector ETFs & Stocks to Buy for 2017 ).
Bank of America Corporation BAC : This North Carolina-based company is one of the world's leading financial services companies. The stock saw rising earnings estimates of 16 cents for this year over the past three months, representing growth of 15.4% year over year. It has a Zacks Rank #2 with a VGM Style Score of B and boasts a solid Industry Rank in the top 8%. Bank of America surged about 15% over the past three months and hit a new 52-week high of $23.55 in late January.
Want key ETF info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report