Donald Trump Has Stopped The Runaway Regulation Train

Posted: May 2018

America’s microcap stocks are thriving under the Trump administration, which has been good for the US economy in delivering tax cuts and unwinding regulation that impaired the growth of small companies.

“The biggest thing that our companies are excited about is deregulation,” said fund manager Christopher Cuesta, who oversees the Thomson Horstmann & Bryant US Micro Cap Fund. “Regulation out of Washington was a runaway train. It was getting worse every year and you didn’t know what was coming down the road from a regulatory standpoint.

“Now that those clouds have parted through deregulation efforts, companies are very, very optimistic.”

This means the thawing of projects that had been “put on the shelf”, observable in backlogs and order rates which are up “dramatically beyond just solid earnings quarters”.

Mr Cuesta said that while the market understood the benefits tax cuts would bring to large caps, it was in fact smaller companies who would be reaping the greatest benefit.

“Amazon and Google as multi-national companies in the US already have a low tax rate,” he said. “I think the average tax rate of a multi-national is 23 to 25 per cent, so the tax reform isn’t going to lower their taxes quite as much.

“The effective tax rate of our portfolio as it sits today is 34 per cent. Now that’s dropping to 21 [per cent] you’re going to have an embedded, 20 per cent earnings increase and also cashflow increase. Thats a big boost to the bottom line.”

He is counting on this flowing through to the rest of the economy.

“The US economy is building strength from the bottom up, not the top down,” he said. “There’s broad-based optimism. They’re hiring, they’re expanding, there’s capital expansion plans and that’s all starting to flow through.”

Mr Cuesta has followed microcaps for most of his career. One of his current holdings is PAR Technology Corporation, which sells the point-of-sale systems to McDonald’s. At its last price of $US14.33, PAR Tech’s market value is up 53 per cent year-to-date to $US230 million.

“PAR Tech is a small company but if they walk into any business in the United States and they say ‘well tell me about your largest customer’ and they say ‘McDonald’s’, you get someone’s attention.”

Brookvine distributes the THB US Micro Cap Fund managed by Mr Cuesta in Australia.

“We’ve looked historically at the US mid-cap index and half of that index, we’ve owned before as microcaps,” he said. “I think its a good reflection of how well we can see the company’s development early on in its life cycle and where it may go. That’s a good reflection of our ability to look forward.”