"I've never seen the economy so good."
What does serial investor and founder of O’Leary Financial Group, Kevin O’Leary, think of the current state of the economy, tax reform, and investing today in America?
Recently, “Mr. Wonderful,” – a moniker O’Leary earned as the surly, yet sensitive Shark appearing on ABC,’s prime-time hit, “Shark Tank” – shared his thoughts and insights during an interview with “Advisors Magazine.” He also shares how he has designed the funds he invests in, and dives deep into why.
America’s economy today – how are we doing?
“The state of the economy is the best I've seen it in 30 years in terms of investing in companies, investing in equities, and debt companies, which I do for a living. I've never seen anything like this. I have investments in over 30 private companies in practically every state and we're having our best year ever,” said O’Leary starting out the interview with a bang.
“I attribute that to two things,” he continued. “One is that the regulatory environment is being lifted, so you see this in practically every state – things are getting easier to do in terms of expanding businesses. Secondly, tax reform has had a dramatic impact on the small companies and the mid-size companies by increasing their free cash by about 20 percent – and the benefit of that is just coming to the floor, we're just starting to see the effect of that.”
So, who gets the credit? Is O’Leary “Team Obama?” Or is he “Team Trump?” Well, he’s non-committal – sort of.
“I don't get into politics too much because I focus on business, but I don't listen to the rhetoric out of Washington and the Tweets and all that stuff,” he said. “What matters to me is, policy and this administration has been very productive in providing policies that have been very pro-business and pro-growth, and it's manifesting itself in job creation. That's why we have the lowest unemployment we've had in decades, and it's getting harder and harder to hire good people because the economy is booming – it's absolutely booming. So, I'm pretty excited about that.”
“Regarding the Obama administration,” O’Leary said, “that was not the same policy, that was a far more regulated, far more slower growth, and not as pro-business, obviously. Our economy was running at a pretty anemic pace of growth. Again, without getting into politics, I'm saying that the output of that administration was not pro-business. So, this is a good time to be an investor. I don't know what's going to happen in politics in the next election, but I'm just telling you I've never seen the economy so good.”
Small Business and Tax Reform
Elaborating on the benefits of President Trump’s Tax Cuts and Jobs Act of 2017 for America’s small business sector, O’Leary references a California company that he has equity in who makes surgical supplies. All their sales are domestic, so there are no trade war and tariff obstacles. Once paying 35 percent tax, now with the new tax legislation, they pay 21 percent.
“Every month now, the company is keeping almost 18 percent of the cash they used to give to the government, and they're investing in plants and equipment, hiring new people, expanding their market – sales are going up and profits are going up. It's just fantastic what's happening here.” said O’Leary, “And so, I’m trying to find more investments like that. Because thirty-five percent to 21 percent reduction is dramatic.”
O’Leary provided further insight on why small and medium businesses, in particular, are benefiting from tax reform.
“The only reason that’s happening is if you're a big company in the S&P 500, you already had almost half your sales in other countries, and so their effective tax rate was 25 percent, they didn't get the full benefit of tax reform. But if all of your sales are domestic in the U.S., you didn’t have any relief and you were paying 35 percent, now you’re only paying 21, so it’s really been a sea change.”
Oh Canada!
The Canadian born O’Leary says he hasn’t invested in his home country in years “because it was not investor-friendly,” but he says that on June 7 of this year “something really interesting happened” and now investment opportunities in Canada are a priority for him.
“The liberal party was swept out of power and annihilated in the Canadian province of Ontario and that is the beginning of a populous movement sweeping the country, just in the way that Trump swept the U.S. In fact, the person elected as premier of Ontario is Doug Ford, brother of Rob Ford who became famous – or infamous – as the mayor of Toronto,” explained O’Leary. (Rob Ford was a Canadian politician and businessman who served as Toronto’s mayor from 2010 - 2014 and left behind a legacy of alcohol and drug addiction while in office – he has since passed away.)
“Doug is pro-business, pro-growth, pro-investment, pro-cutting taxes. Then we're going to have the same election in Alberta which is a very big province for North American energy – there's a socialist government in there now and they’re about to get swept out by a right-wing person.” Then, it’s just a matter of about 14 months before the federal election happens in Canada. I think Trudeau will lose that,” predicted O’Leary.
Through his analysis, O’Leary concludes that the Canadian economy is poised for certain and significant growth. So, he’s done what any hungry Shark does when spotting fresh prey – he’s moved in for the kill by pouncing on the country’s 60 biggest stocks using an ETF called the XIU which represents large Canadian companies that trade on the Toronto Stock Exchange (TSX).
“I just started doing that – I'm using Canadian dollars to buy it, because I'm extremely bullish that this populous movement is going to change Canada, which is great,” he said.
It’s worth noting that in June of this year that the TSX index, Canada’s main stock exchange, hit a record high.
O’Leary on O’Shares OUSM and OGIG ETF’s
Three years ago, O’Leary launched O’Shares ETF Investments which touts a family of six funds, including the O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM) and O’Shares Global Internet Giants ETF (OGIG).
O’Leary explained how the funds originated.
“The Russel 2000 index is all the small companies in America that are public, the problem is not all of them make money. If you're not making money, you're not paying any taxes so you're not going to be getting any tax benefit. If you’re a REIT (real estate investment trust), of which there are many inside the Russel 2000, you also don't benefit from tax reform because you don't pay any tax in the first place,” he said.
So, he sought to whittle the index down to focus on money-makers.
“I wanted to find all the profitable companies inside of the Russel 2000 that were going to have the major benefact of tax reform. So, I asked FTSE Russel, the guys who designed the Russel 2000 index if they could design me an index that just had the companies that are going to have the major benefit of tax reform. Out of the 2000, 244 companies made the cut. And they built an index that's called OUSM, and that’s what I invested in for small cap.”
Now that small cap companies were addressed, O’Shares wanted to take on the big companies of tech, but with a twist of thinking outside of the border. The firm’s newest fund, OGIG, launched in June and a company’s revenue growth was an important metric to make the cut.
“When it came time to invest in e-commerce, I said to my guys, I already own Google, Amazon, and Facebook – everybody seems to own those stocks. But I also know that when Uber revolutionized ride-sharing in America, they didn't end up owning it everywhere else,” said O’Leary.
He knew there were competitors who saw that they could do the same thing as Uber was doing, but in other countries. He instructed his team to find companies that are the next Amazons, Facebooks and Googles that are in other countries like China, Germany, India and Japan.
“So, it turns out there are 52 of them that are all over the world,” O’Leary said. “That's what OGIG became – Giants of the Internet. It’s a global index … and these companies are growing rapidly. Of course, OGIG has Microsoft, Google, Amazon, and Facebook, but it also has all the other companies that you've never heard of – and that's how I invest in the internet.”
O’Leary is also focused on investing in the energy sector, both domestic and globally.
As “Shark Tank” starts its tenth season this fall, Mr. Wonderful will once again be front and center alongside his fellow Sharks listening to hopeful entrepreneurs pitch for an investment. He’ll scrutinize each – outloud – looking to spot what he calculates is a smart investment and one that will result in significant profitable return. Those that don’t make the cut will hear his familiar sign off, “You’re dead to me.”
For more information visit: oshares.com and kevinoleary.com
