Stocks to Buy and Sell If Ted Cruz Is Elected

Examining possible winners and losers under a Cruz presidency

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Apr 27, 2016
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We decided it would be fun to take a look at what stocks might be winners and losers under each of the four leading presidential candidates. We focused primarily on their economic and tax plans to look at what changes might affect the investment world. We’ll go through the candidates in alphabetical order by first name – Bernie Sanders, Donald Trump, Hillary Clinton and Ted Cruz. Before we dive into our picks and pans for a Cruz presidency, I want to explain a little bit about how we will approach things.

Throughout this series we are going to assume that a candidate’s economic plans, as they are defined now, are enacted as is. Obviously, with a divided Congress, no plan will be enacted exactly as the candidate presents it today. Not only that, if politicians are known for one thing, it’s lying. For all we know, these proposals may not even be close to what the candidates actually plan on doing. Additionally, we are also not the “numbers police” and are not here to debate whether a candidate’s numbers add up (you want to enact $9 trillion in tax cuts, go ahead, we will analyze that) and we are not “Very Serious People” deciding whether a plan is “realistic” (you want universal healthcare or a giant wall, we will analyze that). We are going with what the candidates say they will do.

Even though nothing the candidates present is enacted as is, the plans usually do at least show the direction that candidates are leaning. For example, Cruz and Trump are proposing huge tax cuts. Is a flat tax really likely to be enacted? No, but it’s likely if elected Cruz would push hard for some type of tax cut. Likewise, is Sanders' $5 trillion infrastructure plan likely to be enacted as is? No, but if elected he’s likely to push very hard for increased infrastructure spending.

Although the information about the candidates' plans we have to go on is imperfect and subject to change, we still think it’s useful to look at who the winners and losers might be under their plans.

Cruz’s economic platform consists almost solely of his flat tax proposal. Cruz has very little in the way of other concrete proposals or they are simply too small to make a huge difference in the economy (e.g. approving the Keystone XL pipeline). Our primary focus will be on Cruz’s simple flat tax proposal.

Under his plan individuals would be assessed a flat tax rate of 10% on all income with some deductions. Lower and middle income filers would be eligible for a $10,000 standard deduction and $4,000 personal exemption. Under the plan, a family of four would pay no tax on the first $36,000 of income. The plan also keeps the Child Tax Credit and Earned Income Tax Credit (with a few changes). Businesses will by a 16% tax on net business income, which functions as a type of VAT tax even though it is not referred to as such by Cruz.

Cruz’s tax plan would likely shift the burden of taxation from individuals to businesses. When the personal income tax was first introduced, individual income taxes made up approximately 50% of government collected income taxes. Today individual income taxes make up approximately 70% of income taxes collected with corporate income tax making up around 30%.

Cruz’s tax plan would cost about $8.6 trillion over a decade (second only to Trump’s), so the economy would be receiving a tremendous amount of stimulus. Unfortunately, the benefits of the tax cut primarily flow to upper income earners who have a lower propensity to spend. The lowest income filers would receive a tax cut of around $46 or 4% of income, the middle group (middle third) about $1,800 or 3.25% of income and the top 1% would see a $400,000 benefit or 26% of income. The top 1% would see gains of $2,000,000 or 29% of income. Thus, the economy would see a limited benefit as most of the income gains accrue to the top. On the plus side, the tax plan does eliminate the payroll tax, which would reduce the cost of hiring workers for businesses.

In other areas Cruz pledges to repeal Obamacare, increase American exports and pledges to stabilize the dollar (although he does not say how).

In many respects a Cruz economy would be very similar to a Trump economy as they have similar policies and similar goals. Both propose large tax cuts with benefits that primarily flow to higher income earners, both repeal Obamacare, and both want to strengthen American manufacturing. Therefore, both Trump and Cruz will have some similar buys and sells.

Buy:

Luxury goods companies

With Cruz’s tax plan even more heavily weighted toward the top, luxury goods companies should be a great buy. Choosing specific winners is a bit harder as many luxury goods manufacturers derive a substantial portion of sales from China, so U.S. centric luxury goods companies are hard to come by. The U.S. is still Tiffany’s (TIF) largest market but it only accounts for 47% of sales. Movado (MOV) gets a majority (54.8% of sales) of its revenue from the U.S., but is more of a mass-market luxury goods company. Another idea is Toll Brothers (TOL) an upscale US homebuilder or perhaps Ferrari (RACE), or almost all American Tesla (TSLA).

Companies with lots of foreign cash

Like Trump, Cruz is making it easier for companies to move foreign held cash home. His flat tax includes a one-time 10% tax on the repatriation of foreign held cash balances. Shareholders of companies with huge chunks of cash held overseas could benefit nicely from a one-time windfall dividend or stock buyback when the extra cash is brought home (the last one time tax cut resulted in most money being spent this way). Companies like Apple (AAPL) and Microsoft (MSFT)Ă‚ would come out as winners. Cisco (CSCO) and Oracle (ORCL, Financial) are other names with large amounts of overseas cash.

Sell:

Tax preparation companies

This one is probably the easiest to see coming. If Cruz abolishes the IRS and we can pay taxes using a simple app or via postcard, then there is no need for the thousands of H&R Block (HRB, Financial) offices across the country. And who would need to use Turbo Tax (Intuit (INTU, Financial)) either?

Health insurance companies

Like Trump, Cruz promises to repeal Obamacare. As we said in our other article, Obamacare has been a bit of a mixed bag for insurance companies. On one hand it has given health insurers millions of new customers, but on the other hand, some groups of these customers haven’t turned out to be as profitable as the insurers had hoped. Even if the businesses aren’t going as well as executives hoped, losing millions of customers will still be a terrible blow to the companies. When we wrote our previous articles, we listed UnitedHealth Group (UNH, Financial) as one company that could lose out; however, UNH recently reported it was leaving an additional 35 state health care exchanges. So we’ll narrow the list to Aetna (AET, Financial) and CIGNA (CI, Financial) as examples of health insurers that could suffer if Obamacare were repealed.

Financial sector

In lieu of the IRS, Cruz’s tax plan has financial institutions such as banks and brokerages responsible for collecting tax data and withholding taxes. Needless to say this will impose some enormous costs on the financial sector. Brokerages like E-Trade (ETFC, Financial) and Charles Schwab (SCHW, Financial) and banks like Wells Fargo (WFC, Financial) or JP Morgan (JPM, Financial) will see expenses rise. It’s likely that the smallest banks (PowerShares S&P SmallCap Financials Portfolio ETF (PSCF, Financial) ) will be hit the hardest, as they would have fewer resources to fulfill the new requirements.

Final thoughts

Without a lot of specific proposals, it’s tough to single out winners and losers under Cruz. Cruz’s tax plan really doesn’t change a whole lot other than lowering taxes for the already wealthy, so the effects will be minimal. Other issues such as Cruz’s call for a stable dollar are hard to analyze without information on how he plans on doing that. On the issue of protecting American manufacturers and boosting exports, Cruz’s plan is not fully fleshed out (or is incoherent, I’ll leave that judgment up to you). His VAT tax proposal would not alter import or export costs, so it would have no effect on the current trade balance (both importers and domestic sellers would be paying the new VAT thus the playing field is level). If he alters his proposal to one closer to Trump’s tariff proposal, you can consulate our Trump article for how that may play out.