Mid-capitalization stocks could stand to benefit the most from the Republicans’ pending tax reform legislation, said entrepreneur and Softkey co-founder Kevin O’Leary.
“The most interesting place to be right now, if you believe we’re going to get a 20 to 22 percent corporate tax rate, is in companies that pay that kind of tax,” O’Leary said Wednesday on CNBC’s “Power Lunch.”
“They tend to be found in the Russell 2000. They’re domestic companies with 100 percent of their revenue in the U.S.,” he said.
The Russell 2000 tracks stocks with smaller market caps — the average company’s total value is about $2.27 billion, and the index’s largest company boasts a capitalization of $6.55 billion, according to the FTSE.
While the sheer number of small companies that “don’t make any money” in the Russell might make the index less than enticing, O’Leary said it’s well worth searching for the biggest fish in a lake filled with minnows.
“You have to do a lot of work to find the ones that are actually candidates. They have to be profitable — generally they’re larger cap, around a $4 billion market cap — but they are going to have an extraordinary upside,” he said.
Unlike a tech behemoth on the S&P 500, O’Leary said, these small- to mid-cap companies don’t harbor huge proportions of their revenue in foreign countries. Partly for that reason, these smaller companies can expect a much more significant windfall from a slashed corporate tax rate.
Many opponents of the tax reform legislation have argued that its changes would disproportionately benefit the wealthiest corporations and individuals at others’ expense.
A study of an earlier proposal in September from the Tax Policy Center concluded that the richest 1 percent of U.S. taxpayers would receive more than half the benefits. And as recently as last week, the nonpartisan Congressional Budget Office said lower-income Americans would be increasingly burdened over time as certain tax deductions expired over the next decade.
O’Leary, however, sees it differently. “I’m going small-town America here, and I think it’s going to really work.”