Three Tax Holiday Investments

Markets are still looking very nice, but the biggest boom of the “Trump Rally” seems to be over for now. In the frenzy of buying, one of the few sectors to take a hit was technology. And some of the biggest names are still down 5% or more since the election.

My colleague Briton Ryle pointed out how ludicrous this sell-off was a couple of weeks ago while it was still in full swing. As far as either of us can figure, people seem to be scared that tougher immigration policies will make it hard to get top talent to tech companies. But, as Brit said, that’s just unreasonable. These are some of the biggest companies in the world and some of the biggest contributors to U.S. GDP. They’re just not going to get steamrolled by policy.

2.5 Trillion Wasted Dollars

Plus, as Brit also mentioned, tech companies are holding a ton of cash offshore to avoid high taxes here at home. Back in 2005, the amount dropped thanks to a repatriation holiday, but since then, it’s grown at a rate of about 19% per year.

According to Capital Economics’ calculations, U.S. companies are currently holding over $2.5 trillion in overseas accounts. That’s a 20% increase from two years ago and equal to about 14% of the U.S. GDP. Or in other words, a ton of dough.

The U.S. has the highest corporate tax rate in the world at 35%, and any foreign funds that come back home are hit at that rate. But that could all change under a Trump presidency. The Donald has suggested a tax holiday for companies holding cash offshore that would allow them to bring it back at a 10% tax rate. He’s also a fan of revising the overall corporate tax structure to make keeping earnings here more appealing for U.S. corporations.

If the new president is able to get those plans through (which is pretty likely with a Republican-controlled House and Senate), that would mean a ton of extra dry powder that companies could use for reinvestment in domestic growth or dividends and share buybacks to return it to shareholders.

The Top Three Tax Break Investments

This all got me thinking… There are a bunch of tech companies with money parked overseas. And there are a bunch that saw share prices tumble in the wake of the election. But which ones would make the best investment, both from a cash repatriation perspective and from a value investing one?

So, I went digging through SEC reports, valuation ratios, financial statements, and share price charts to find the companies that are most attractively priced and would benefit the most from a tax holiday. Three of them stood out on my list as the best investments.

All of them have 60% or more of their total cash parked offshore waiting to be spent or returned to shareholders. All of them have solid fundamentals and top-notch management teams. And all of them are still down 5% or more from the post-election tech sell-off.

Tax Break Investment #3: Alphabet/Google (NASDAQ: GOOG, GOOGL)

After the election, Alphabet (the parent of Google) saw share prices drop over 7%. And even after a bit of a recovery, it’s still down a little over 6%. That alone makes it a target for a value investor. It’s not a huge sale, but it’s still a nice discount that’s sure to be made up in the very near future — tax holiday or not.

But if Alphabet is able to bring back the nearly $40 billion it has parked overseas (that’s about 60% of its total cash), it becomes an even better buy at today’s price. With that money, the company could increase its share buyback program and return a solid chunk of change to investors. Or it could reinvest the money within U.S. borders in order to grow its business even bigger.

Either way, shareholders stand to benefit the most.

Tax Break Investment #2: Qualcomm (NASDAQ: QCOM)

Number two on my list is semiconductor and telecom equipment maker Qualcomm. Its price is down about 6% since the election sell-off began.

Fundamentally, nothing changed at the company. It’s still one of the biggest in its industry and has some of the best numbers to boot. It’s undervalued when compared to industry peers and pays a dividend much higher than the average. Plus, management has been able to grow revenues at an average rate of 13.16% over the past 10 years. Add to that the fact that 87% of Qualcomm’s total cash holdings are offshore, and you’ve got a pretty enticing play on a tax holiday investment.

If the company were able to bring that $30 billion back home, there’s no doubt it would be put to good use increasing the already large dividend and growing the company even more.

Tax Break Investment #1: Cisco Systems (NASDAQ: CSCO)

Here you’ve got a company that I was recommending to subscribers of The Wealth Advisory even before it went on “Trump sale.” Now that it’s down about 5% because of overblown fears, I can’t encourage ownership enough.

It’s the company that made the Internet possible with its connections and switches, but still managed to grow revenues at an average rate of about 6% a year over the past decade. And its P/E ratio is well below the industry average. That means you can get a great company at a discounted price relative to its peers. Add in that 5% discount from the sell-off, and you’re talking about quite an opportunity.

Then, when you think about how much money it has stashed overseas just waiting to be spent growing the business and paying shareholders, it gets really enticing. Cisco has over 90% of its cash parked in overseas accounts. That’s about $53 billion it could return to shareholders and reinvest in domestic programs. And that’s just what the company would do if it could get to the money.

In fact, CEO John Chambers went as far as to admit that the only reason Cisco is investing so much in international operations is because of the tax laws in the U.S. “I’d prefer to have the vast majority of my employees here,” Chambers said. “And our tax policy is causing me to make decisions that I don’t think is in the interest of our country, or even in our shareholders, long term.”

With a leader who’s already admitted shareholders would be better off having those investments made here in the U.S., you can bet all that cash would be put to very good use once it’s back in American bank accounts.

There are a good number of other companies out there with tons of cash stockpiled in offshore accounts, and also a bunch with prices still low after the tech sell-off. But those three have some of the biggest discounts and largest percentages of total cash overseas.

And that’s what you want to look for in a tax holiday investment: How much they will benefit, not just how much they will bring back. Those three are a good start and a great addition to your portfolio.

But don’t stop there. With a little research and a few hours of your time, you can find even more great deals out there and get your portfolio ready for a reformed tax code and collect your share of the trillions of repatriated dollars.

To investing with integrity (and good research),

Jason Williams
Wealth Daily

Follow me on Twitter @AllBeingsEqual