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Buy 'repatriation stocks' because that is sure to make the cut in the final tax bill, UBS says

Evelyn Cheng

Investors shouldn't wait to find out the exact details of Washington's tax reform, but instead immediately buy shares in the companies that will benefit from the parts of the legislation most likely to survive the partisan debate, UBS analysts said.

Repatriation, or bringing overseas profits back to the U.S., is "one element of tax reform that both sides of the aisle can agree on," UBS Strategist Julian Emanuel said in a note Sunday. His call for the week is to "buy repatriation stocks."

"The potential for continued buybacks (and resulting EPS uplift) from repatriation reinforces our overweight call on Tech and Health Care, which together hold over 80% of the offshore cash," Emanuel said in the note.

Source: UBS analysis of Company 10-Ks. Of the S&P 500 constituents, 230 disclosed cash held offshore. Cash represents cash and short-term marketable securities. A few instances exist in which a company includes long-term investments.

The House last week passed a Republican plan to replace the Affordable Care Act, paving the way for Congress to discuss tax reform. President Donald Trump has proposed cutting the tax rate on returning overseas profits to 10 percent from 35 percent, and many on the Street expect companies will use their cash hoards to buy back stock.

Buybacks reduce the share count for a stock, increasing the earnings per share and theoretically benefiting shareholders. However, critics say cash would be better deployed in longer-term business investments such as capital expenditures.

S&P 500 companies hold about $2.4 trillion in unrepatriated profits and more than $1 trillion cash overseas, according to UBS.

In a note last week, UBS analysts listed the 10 stocks they expect will benefit the most from repatriation:

Source: UBS. *Assume repatriation under the GOP Blueprint with 75% of liquid capital and 25% of illiquid capital used for share repurchases.

Trump did not give a specific number for repatriation in his plan released last month. Companies could also use repatriated cash to pay down debt, rather than buying back shares.

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