U.S. President Trump has threatened to impose further tariffs on Chinese goods, while Beijing warned it would retaliate. This has heightened the trade spat between the two of the world's largest economies. Investors, naturally, have turned nervous as earnings of companies could be at risk in the event of a global trade war.
But there are some companies that might benefit. Among these are producers of goods that do limited business in China, have solid growth narratives and their promising outlook remains unfazed by the change in tariffs. Thus, investing in such winners at times of a trade war will not be a bad proposition.
Trump Ups the Stake in Trade War
The chances of a trade clash between Washington and Beijing intensified after Trump instructed the U.S. Trade Representative's office to figure out $200 billion in imports from China for additional tariffs of 10%. He added that the United States may impose tariffs on another $200 billion provided the Asian nation retaliates.
Last week, Trump threatened to impose a 25% tariff on $50 billion Chinese imports. The tariffs will be passed in two phases. More than 800 Chinese exports, worth $34 billion, will be subject to tariffs beginning in July and another 280 or so will go through a public comment period and take effect later.
Trump said that "the United States will no longer be taken advantage of on trade by China and other countries in the world" and that the U.S. "will continue using all available tools to create a better and fairer trading system for all Americans."
The tariffs are intended to force China change its unfair practices with respect to technology and innovation. But regrettably China is hell-bent on increasing its tariffs on $50 billion worth of U.S. exports (read more: Trade War Fears Grip Wall Street: Buy 5 Ultra-Safe Stocks ).
Global Fund Managers Turn to Alibaba
Trade wars are headwinds for companies as these erode profit margins and affect the overall economy. Thus, this rising tension has compelled top fund managers to look for companies that can emerge as winners. These companies have a strong domestic business and are unperturbed by import tariffs or in other words have a dominant market position.
George Maris, a portfolio manager of the $2.2 billion Janus Henderson Global Select fund has identified one such company. That is none other than Chinese e-commerce giant Alibaba Group Holding Limited BABA , primarily, because of its domestic exposure.
The company's expected earnings growth rate for the current year is 26.7% compared with the Internet - Commerce industry's estimated rally of 12.3%. The company has also outperformed the industry in the last year (+50.7% compared with +49.1%).
Google, Facebook & Axon Enterprise Undeterred by a Trade War
Companies that have long-term growth narrative will also not be affected by a trade war. Notable, among them are Alphabet Inc. GOOGL , Facebook, Inc. FB and Axon Enterprise, Inc. AAXN . Google's growth is dependent on an uptick in digital advertising, since the search engine controls more than 40% of the U.S. digital ad market. Google's focus on smart home technology, cloud data centers and automated driving drives the company's earnings. All these areas are unlikely to be affected by a trade war.
Similarly, Facebook's growth is mostly in digital advertising. Facebook controls 20% of the U.S. digital ad market, while Instagram controls another 5%. Needless to say that digital advertising industry is hardly affected by the implementation of tariffs.
Axon Enterprise sells an array of digital solutions including cloud data storage systems and mobile video apps to law enforcement agencies throughout the world. Such agencies are in desperate need of a technology makeover, which gives the stock a solid growth narrative.
In fact, shares of Alphabet, Facebook and Axon Enterprise rose 2.1%, 1.3% and 2.7% on Jun 18, respectively despite Trump's threat to escalate the trade fight with China.
Why Thinking Small is Not the Only Thing to Do Now?
In the wake of Trump's tariff announcement, investors seem to be shifting into small-cap stocks. And why so? This is because such stocks tend to have higher proportion of domestic sales compared to large-caps. But, in reality, the difference isn't much. Per data from FactSet Research, small-caps stocks in the Russell 2000 index derive 20.6% of their revenues from outside the United States, while stocks from the broader S&P 500 derive 30.3%.
Satellite player Harris, electrical equipment maker Hubbell, seller of lighting equipment Acuity Brands, aerospace and defense players KLX and L3 Technologies, Inc. LLL , conglomerate Roper Technologies, Inc. ROP , and factory control specialist Rockwell Automation derive a meagre 10% of revenues from China, per UBS.
Goldman stated that CSX Corporation CSX , CVS Health Corp, Dollar General Corp, Public Storage, Verizon Communications Inc and Wells Fargo derive 100% of their sales from the United States. Intuit Inc. INTU is another company that derives 95% of its sales from the country, Goldman added. Hence, it's quite natural that these companies stand to gain the most as trade war escalates. After all, their profits aren't getting eroded due to limited exposure to foreign markets.
5 Solid Choices
Thus, investing in the aforesaid stocks as the specter of a global trade war looms seems prudent. We have selected five stocks that carry a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Axon Enterprise develops, manufactures, and sells conducted electrical weapons. The stock, currently, has a Zacks Rank #1. In the last 60 days, six earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings soared 92.7% in the same period. The company's expected earnings growth rate for the current year is 75.6% compared with the Security and Safety Services industry's estimated rally of 16.4%.
Axon Enterprise, Inc Price and Consensus
Axon Enterprise, Inc price-consensus-chart | Axon Enterprise, Inc Quote
Intuit Inc provides financial management and compliance products and services for small businesses, consumers, self-employed, and accounting professionals. The stock currently has a Zacks Rank #2. In the last 60 days, nine earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 3.4% in the same period. The company's expected earnings growth rate for the current year is 25.4% compared with the Computer - Software s industry's estimated rally of 12.6%.
Intuit Inc. Price and Consensus
Intuit Inc. price-consensus-chart | Intuit Inc. Quote
L3 Technologies provides aerospace systems, communication, electronic, and sensor systems used on military, homeland security, and commercial platforms. The stock has a Zacks Rank #2. In the last 60 days, six earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings advanced 2.2% in the same period. The company's expected earnings growth rate for the current year is 14.2% compared with the Electronics - Military industry's estimated rally of 9.6%. You can see the complete list of today's Zacks #1 Rank stocks here.
L3 Technologies Inc. Price and Consensus
L3 Technologies Inc. price-consensus-chart | L3 Technologies Inc. Quote
CSX Corporation provides rail-based transportation services. The stock currently has a Zacks Rank #2. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 0.9% in the same period. The company's expected earnings growth rate for the current year is 42.2% compared with the Transportation - Rail industry's estimated rally of 22%.
CSX Corporation Price and Consensus
CSX Corporation price-consensus-chart | CSX Corporation Quote
Roper Technologies designs and develops software, and engineered products and solutions. The stock currently has a Zacks Rank #2. In the last 60 days, seven earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings advanced 1.6% in the same period. The company's expected earnings growth rate for the current quarter is 20.5% compared with the Manufacturing - General Industrial industry's estimated rally of 5.8%.
Roper Technologies, Inc. Price and Consensus
Roper Technologies, Inc. price-consensus-chart | Roper Technologies, Inc. Quote
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report CSX Corporation (CSX): Free Stock Analysis Report Alibaba Group Holding Limited (BABA): Free Stock Analysis Report Facebook, Inc. (FB): Free Stock Analysis Report Alphabet Inc. (GOOGL): Free Stock Analysis Report Intuit Inc. (INTU): Free Stock Analysis Report L3 Technologies Inc. (LLL): Free Stock Analysis Report Roper Technologies, Inc. (ROP): Free Stock Analysis Report Axon Enterprise, Inc (AAXN): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research