President Trump has threatened to expand tariffs on Chinese goods, which many fear will trigger a Chinese harassment of U.S. businesses. The trade spat between the two countries did take a toll on the iPhone maker, semiconductors, industrial behemoths, steel producers and automobiles.
But, the same cannot be said about defensive players, regional producers and companies with strong growth narratives. Shares of such companies easily bucked the sharply negative tone of the broader market.
Trade Tensions Surge
Trump caught China off guard with his announcement of new tariffs. If China retaliates against U.S. trade policies, then the White House would impose tariffs of 10% on additional $400 billion of Chinese imports. White House senior trade adviser Peter Navarro and U.S. trade representative Robert Lighthizer argue that the Trump administration took this tough stance as China represents a fundamental threat to the United States in terms of technology and innovation.
China, unfortunately, remained hell-bent on increasing its tariffs on $50 billion worth of U.S. exports and accused the United States for ratcheting a trade war. The Chinese Ministry of Commerce also pledged to apply qualitative retaliatory tactics. Mark Zandi, chief economist at Moody’s Analytics added that ‘the qualitative thing they could do [would be to] devalue the currency — that would be even more extreme — to offset the impact of the tariffs on their products.”
Tariff tantrums and the prospect of a global trade war have roiled Wall Street. But there are stocks that have benefited from the rising trade tensions (read more: 5 Top Stocks to Gain From Escalating Trade War Tensions).
Trade Fears Force Investors to Play Defensive
Defensive stocks have been under tremendous pressure this year so far, partly due to rise in bond yields. But as the markets are plagued by trade related uncertainty, defensive stocks are moving north. After all, such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with the activities in the broader market. Their products are in constant demand irrespective of market volatility and such names include companies from utilities and consumer staples.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaltered during market gyrations.
A notable company from the electric power industry, CenterPoint Energy, Inc.’s (CNP - Free Report) expected growth rate for the current year is 16.1% compared with the industry’s estimated rally of 6.4%. CenterPoint Energy flaunts a Zacks Rank #2 (Buy).
In the same way, Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) that offers food products, housewares, books and stationery, bed and bath products, is projected to gain 36.8% this year compared with the Consumer Products - Staples industry’s estimated rally of 12.1%. Ollie's Bargain Outlet also carries a Zacks Rank #2.
Domestic Producers Outperform Multinationals
Despite escalating trade concerns, domestic producers remain fairly immune. This is because such stocks have high domestic exposure in terms of revenue generation, which shields them from the aftermath of international disputes. On the contrary, trade issues are headwinds for bigwigs as these erode overseas profits.
One such domestic player as per Goldman is Roper Technologies, Inc. (ROP - Free Report) . The conglomerate derives a meagre 10% of revenues from China. The company’s expected growth rate for the current quarter is 20.5% compared with the Manufacturing - General Industrial industry’s estimated rally of 5.8%. Roper Technologies has a Zacks Rank #2.
Companies with Solid Growth Narratives Emerge Winners
Not all multinationals, though, are bearing the brunt of escalating trade tensions. Notable, among them are Alphabet Inc., Facebook and Axon Enterprise, Inc. (AAXN - Free Report) . This is because their long-term growth narrative will not be affected by a trade war. And why so? Google’s growth is dependent on an uptick in digital advertising, while Facebook’s growth is also mostly in digital advertising space. Needless to say that digital advertising industry is hardly affected by the implementation of tariffs.
Axon Enterprise, in the meantime, 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 and helped it earn a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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%.
Let’s now take a look at those who aren’t as lucky, and why?
The iPhone Maker & Chip Stocks Feel the Pain
As trade tensions escalate, Apple Inc. (AAPL - Free Report) could be most at risk. After all, Apple has generated around 20% of its revenues or $44.7 billion from Greater China. It has also shipped nearly 41 million iPhones into China and is now the fifth largest player in the market, as per IDC. To top it, the company has 40 stores in China and operates services such as the App store and Apple Music.
Not to forget, Apple is dependent heavily on its suppliers. The iPhones are assembled in China by Taiwanese firm Foxconn. Shares of Apple have been moving downward since the beginning of the trade spat between the two largest economies in the world. The iPhone maker saw its shares decline 1.6% on Jun 19.