3 Buy-Rated Stocks Primed to Gain from a China Trade Deal

There’s a high level of optimism coming out of Washington, DC lately, which may sound odd considering the vitriolic tone of most Beltway politics. But last December, Presidents Trump and Xi agreed to a 90 day truce in the ongoing trade disputes, and late in February Trump further delayed the initiation of punitive tariffs. American and Chinese negotiating teams have stepped up, and made good use of the time given.

The White House has acknowledged the positive momentum publicly. Secretary of State Mike Pompeo said on Monday, referring to a trade deal, “We're trying to get that rectified, get that fixed, make it fair and reciprocal and I think we're on the cusp of doing that and I hope all those tariffs will go away.”

Details of the emerging deal are still not released, but the broad outlines of a US-China trade agreement are coming clear. Washington is preparing to remove or reduce punitive sanctions against Chinese products. Beijing is offering to lower tariffs and entry restrictions on certain American products: farm implements, cars, chemicals, and microchips.

While nothing is cast in stone, China’s offer can help us choose stocks that stand to gain from the final agreement. We’ll take a look at three such companies, along with their ratings from top-ranked analysts in the TipRanks database.

General Motors Company (GMResearch Report)

Among the known facets of a trade agreement, China is offering to ease protectionist restrictions around their automotive market. Under current rules, foreign car companies are required to contract with a Chinese partner company to do business in the country, and cars are subject to an import tariff of 15%.

A freer Chinese car market would be a boon to the world’s auto manufacturers. China’s automotive market is the world’s largest, and saw well over 25 million new cars sold in 2018. The largest of the Big Three, GM is well-positioned to gain should the Chinese government open up the auto market. GM’s luxury Cadillac brand sells well in China, and GM has the second-highest sales among foreign car companies in the country.

GM showed gangbusters Q4 2018 results last month, with solid beats on both revenues and EPS. Regarding the quarterly earnings, RBC Capital analyst Joseph Spak (Track Record & Ratings) says, “The details of the quarter - which were strong - should lead investors to have more confidence in 2019 EPS.” Spak’s confidence is clear from his $52 price target and 32% upside on the stock.

Itay Michaeli (Track Record & Ratings), writing from Citigroup, agrees that GM is on solid footing. He says that the company’s “long-term upside potential case has probably never been as visible as today,” and sets an aggressive $67 price target, suggesting 70% upside to GM shares.

GM has a ‘Strong Buy’ rating from the analyst consensus, based on 9 ‘buys’ and 3 ‘holds.’ The stock’s $48 average price target suggests a 22% upside when compared to the current $39 trading price.

Deere & Company (DEResearch Report)

The iconic tractor and agricultural machinery company faces a triple threat from the US-China trade tensions: first, increased costs for raw materials; second, increased tariffs and restrictions on imported products; and finally, Chinese restrictions on US bulk produce leading American farmers to cut back on harvesters and other machinery. It was a grim picture.

But now China is putting increased agricultural purchases from the US on the table, offering to import some $30 billion per year of soybeans, grains, and other farm goods – including the industrial grade machinery needed to work the fields. It directly addresses two of Deere’s major concerns on the trade issues.

The improving trade situation worked with a guardedly upbeat Q1 2019 earnings report to bring DE a boost in the markets. The earnings showed a return to profits after losses last year, tempered by missing Wall Street’s expectations on EPS. The analysts, however, see potential for DE.

Credit Suisse’s Jamie Cook (Track Record & Ratings) and Citigroup’s Timothy Thein (Track Record & Ratings) both gave ‘Buy’ ratings to DE stock, with target prices of $209 and $180. UBS analyst Steven Fisher (Track Record & Ratings) laid out the clear bullish case for DE: “It is too early to write off Deere's potential for 2019. There are three ways confidence can be improved: a trade deal with China, government support payments, and growing season dynamics.” Fisher’s price target is the most cautious of the lot, at $177.

Overall, Deere is another ‘Strong Buy’ stock, with 7 ‘buy’ ratings and 1 ‘hold.’ DE shares are trading for $165, so the average price target of $179 gives an upside potential of 8.25%.

Micron Technology, Inc. (MUResearch Report)

Hi-tech, of course, has been one of the highest charged areas of the trade dispute. From intellectual property protections to forced technology transfers from US companies to Chinese to flat-out trade disagreements on semiconductor chips, the US and China have their work cut out seeking an agreement in this sector. An agreement, however, will have a powerful impact on US chipmaker Micron, as rumors have China agreeing to import up to $200 billion in US semiconductor chips over the next six years.

Micron is the world’s fifth-largest seller of semiconductor computer chips, and saw the second highest gain in market share when it increased sales 33% between 2017 and 2018. At the end of last year, the company’s sales totaled over $31 billion.

Wall Street’s top analysts agree that the future is looking bright for MU stock. Vijay Rakesh (Track Record & Ratings), of Mizuho Securities, says, “While data center (DC) and server demand remains slow, we believe…supply issues at a major competitor has resulted in MU gaining some DC hyperscale orders…We believe potential supply bottleneck could be a tailwind for MU…” He gives the stock a target price of $45, suggesting a 9% upside potential.

From Deutsche Bank, Sidney Ho (Track Record & Ratings) agrees that Micron’s prospects are upbeat, especially as this year goes on. “Aggressive capex cuts by memory suppliers combined with a recovery in server demand should lead to a more favorable supply-demand environment by mid-2019.” Ho gives Micron a price target of $48, implying a potential upside of 16%.

Micron’s analyst consensus is a ‘Moderate Buy,’ based on 16 recent ‘buy’ ratings, 6 ‘holds,’ and 1 ‘sell.’ The stock has an average price target of $50 and a share price of $41, giving it a 22% upside potential.

Author: Michael Marcus

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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