JPMORGAN: There's still a fortune to be made betting on tax reform
- JPMorgan says that the market is underpricing the potential for stock market gains in the event that the Republican tax bill passes.
- The firm recommends buying bullish single-stock call options on a handful of companies closely linked with tax reform progress.
Banks across Wall Street are bullish on stocks heading into 2018, with many citing the positive effect of tax measures proposed by the GOP.
JPMorgan is one of those firms, and it thinks investors are asleep at the switch, ignoring crucial upside in equities in the event that tax reform measures pass. The bank estimates that the S&P 500 has the potential to climb 5% from current levels.
"The most significant near-term upside catalyst for equities is still ahead - passage of the US tax bill," Shawn Quigg, an equity derivatives strategist at JPMorgan, wrote in a client note. "Our analysis indicates the market is significantly underestimating the probability of tax reform passage."
However, since there's so much uncertainty still lingering around the tax plan, Quigg says traders have to pick their spots carefully. This means eschewing broader stock index bets and focusing on single stocks closely linked to tax reform progress.
The table below shows JPMorgan's most high-conviction single-stock tax bets. In order to identify them, the firm screened its proprietary index of tax-linked companies, zeroing in on those with robust options trading volume and low implied volatility.
JPMorgan's recommendations with the bill, which cleared the Senate Finance Committee before Congress' Thanksgiving recess, is expected to be rolled out Tuesday for debate and amendments on the Senate floor. A vote is expected by the end of the week.
As Business Insider's Bob Bryan points out, the plan could run into some trouble. Wisconsin Sen. Ron Johnson, one of two public Republican "no" votes on the Senate tax bill, told reporters Monday that unless there are changes made to the bill he plans to vote against the plan in the Senate Budget Committee.
Still, if you remain optimistic, JPMorgan's suggested strategy is one to consider. After all, with so much uncertainty surrounding tax reform, those willing to risk positioning for upside could wind up reaping huge profits.