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Canadian Investors Looking for Exposure to U.S. Tax Cuts Need to Consider This 1 Company

Phillip Ingham

With a significant amount of discussion of late centering on the new tax rules, which are now in effect in the U.S., Canadian investors looking to capitalize on this new regulatory environment certainly have a significant amount of homework to do. After all, tax cuts do not affect every sector or even every company within the same sector to the same extent, so gauging how much of a bottom-line benefit companies will garner from these tax cuts is often a very hard, but necessary, thing for investors to do.

An interesting trade I have been following of late has been for many investors to begin to funnel money out of sectors that have soared with corresponding low taxation rates, such as technology, and into sectors with higher average taxation rates and slower growth in recent years, such as materials or commodities. This trade makes sense from a theoretical point of view; however, idiosyncratic differences between the tax structures of various companies within materials or commodities, for example, add a layer of difficulty to the valuation game in putting a price tag on the benefit shareholders can expect to receive from these cuts.

One sector I think has not seen the full benefit of U.S. tax cuts priced in to future earnings is the Canadian financials space; this is perhaps largely due to the idea that many of the Canadian banks are too heavily focused in Canada and may not directly benefit from these tax cuts as much as stocks south of the border might. While this certainly may be true in the case of Canada-heavy banks such as Canadian Imperial Bank of Commerce, other banks, such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD), with very substantial retail and money management networks in the U.S. market, stand to benefit much more from these changes.

The $400 million write-down I spoke of in a recent article is a testament to the net short-term impact these tax changes will have on TD’s bottom line. With some investors actually predicting an earnings miss for TD given the fact that these unexpected write downs are not priced in to some of the analyst target prices, it should also be noted that TD may adjust its earnings to account for these one-time events, and these write downs will thus likely not be a big deal.

Bottom line

I see TD Bank as being one of the key beneficiaries of U.S. tax reform on the Canadian stock exchange and would encourage every investor looking to take advantage of this phenomenon to attempt to price out the tax-related benefit to TD; I believe it is much higher than the bump TD has seen since this tax reform was confirmed, and as such, I would recommend this company as a near-term buy for a long-term investor at current levels.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

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