Right now, we are seeing a big move in the stock market as investors sell their tech stocks to take profits. With all that freed-up money, they are moving into stocks that have underperformed.
Two of the main groups of stocks they’re starting to buy are financials, such as bank stocks or investment broker companies, and stocks of companies with a high tax rate.
The recent tax bill that was passed lowers the corporate tax rate from 35% to 20%. That will make a huge difference in the bottom line of companies that spend a lot of money. Tech stocks, on the other hand, have the lowest tax rate of any sector: 24%.
A lot of people base the value of a stock off of how much net income it brings in. Because the tax rate is cut almost in half, big companies that spend a lot to make things like machinery or sell things at a low markup will be saving billions of dollars, giving a huge boost to their net income.
When a company spends a lot to make its products, there’s not a lot left afterward, and what’s left now will be taxed a lot less. That can mean proportionally large increases to its bottom line.
Examples of companies that will benefit from this tax bill are ones like Deere & Co. (NYSE: DE) and Dollar Tree Inc. (Nasdaq: DLTR).
Deere spent about $20 billion to make its products over the past year, and it sold them for $26 billion. Dollar Tree sells things for a dollar each, some of which cost it more to buy.
Both of these companies need all the help they can get when it comes to making a profit, and the tax bill will give them that luxury.
This move from tech into other sectors is also known as sector rotation. That’s a sign of a healthy stock market, as investors aren’t all piling into one thing at the same time. They are able to find value elsewhere.
That means the market is being taken up by all, or most, kinds of stocks, rather than one thing, like in the tech bubble of 1997 to 2000.
Regards,
Ian Dyer
Internal Analyst, Banyan Hill Publishing