Trump’s latest threat to block Chinese investments in and sales to U.S. tech firms slammed chip and Chinese Internet stocks. Not to forget, he has already threatened to slap tariffs on European cars entering the United States.
Thus, escalating trade tensions took the sheen off Wall Street. This, in turn, calls for investing in small-cap defensive companies. Such stocks provide risk-adjusted returns and steady earnings regardless of the state of the equity market, while higher domestic revenue exposure will be a hedge against trade issues.
Trump Plans to Keep China Away From U.S. Tech
Trump has been embroiled in a trade conflict with China by barring several Chinese companies from investing in U.S. technology firms. The Treasury Department is putting together regulations that would restrict firms having at least 25% Chinese ownership from acquiring companies involved in what the Trump administration calls “industrially significant technology.”
Trump also intends to block additional technology exports to Beijing, according to people familiar with his plans. The National Security Council and the Commerce Department are crafting new rules for “enhanced” export controls. Thus, technology won’t get shipped to China.
These tariff initiatives are aimed to prevent Beijing from achieving its plans outlined in its “Made in China 2025” report to become a global leader in the technology field, including information technology, aerospace, electric vehicles and biotechnology.
High-Flying Tech Stocks Take a Beating
These new rules for Chinese investments and exports affected tech companies. Netflix, Inc. (NFLX - Free Report) , the streaming-media company, saw its shares tank more than 6% following this. After all, it partners with iQIYI, Inc. and offers streaming service in China. Shares of iQIYI plunged 9.4%. Other Chinese Internet stocks that took a hit include Alibaba Group Holding Limited and Baidu, Inc., down 5.3% and 3.3%, respectively.
What’s more, chip stocks weren’t spared. Highfliers such as Micron Technology, Inc. (MU - Free Report) , which is already facing tough investigations in China, saw its share drop more than 5% after surging nearly 31% in 2018 (read more: Micron's Blowout Earnings Drive Chipmakers: 5 Top Picks).
Other notable chip stocks including NVIDIA Corporation and Advanced Micro Devices, Inc. plummeted as well. Both the stocks lost more than 4%.
Trump Issues New Threats Against America’s Trade Partners
But not just China, Trump has threatened all of America’s trade partners asking them to do away with trade barriers and tariffs, or prepare to face the necessary consequences.
Trump said in a tweet that “the United States is insisting that all countries that have placed artificial Trade Barriers and Tariffs on goods going into their country, remove those Barriers & Tariffs or be met with more than Reciprocity by the U.S.A. Trade must be fair and no longer a one way street!”
Trump has already threatened to impose 25% tariffs on all European cars. This was in response to the European Union’s decision to levy 25% tariffs on more than $3 billion worth of U.S. items.
The President tweeted that “based on the Tariffs and Trade Barriers long placed on the U.S. and [its] great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S.”
Trump’s Trade Threats Rattle Wall Street
The U.S. ratcheting a trade war with China and all of its trading partners hasn’t gone down well with the broader markets either. Needless to say, a trade war dents corporate profits and hampers economic growth in the long run.
The Dow Jones Industrial Average DJIA tumbled 328.09 points, or 1.3%, to 24,252.80 on Jun 25. The blue-chip gauge not only saw its steepest one-day drop since May 29 but also closed below its 200-day moving average. According to Bespoke Investment Group, “the Dow hasn’t closed below its 200-day moving average for 501 consecutive trading days going back almost two years exactly to June 27, 2016.”
The S&P 500 also fell 37.81 points, or 1.4%, to 2,717.07. The broader index faced its biggest daily decline since Apr 6, closing at its lowest since May 31.
Stocks That Could Be Big Winners in a Trade Conflict
As the markets are plagued with trade-related uncertainty, defensive stocks seem to be the safest investment options. Such stocks are generally non-cyclical or companies whose performance and sales are not highly correlated with activities in the broader market. Their products are in constant demand irrespective of market volatility and such names include companies from the utilities and consumer staples sectors.
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 unaffected by market gyrations.
Further, only small-capitalization stocks from such defensive companies have been selected. This is because such stocks have high domestic exposure in terms of revenue generation, which shields them from international disputes. The Russell 2000 index, the benchmark for small caps, derives 78.6% of revenues from the United States, while large-cap benchmarks like the Dow fetches just 52.8% from the United States.
5 Top Picks
We have, thus, selected five such stocks that hold a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Craft Brew Alliance, Inc. (BREW - Free Report) brews and sells craft beer and cider, mostly in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for earnings rose 5.1% in the last 60 days period.
The company’s expected earnings growth rate for the current year is 192.9% compared with the Beverages - Alcohol industry’s estimated rally of 14%. The stock has outperformed the broader industry in the year-to-date period (+5.5% vs -9.9%).
The Chefs' Warehouse, Inc. (CHEF - Free Report) distributes specialty food products in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for earnings increased 0.7% in the last 90-day period.
The company’s expected earnings growth rate for the current year is 65.9% compared with the Food - Miscellaneous industry’s estimated rally of 15.6%. The stock has outperformed the broader industry so far this year (+39.3% vs -7.8%).
Turning Point Brands, Inc. (TPB - Free Report) provides other tobacco products, primarily in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for earnings rose 18.2% in the last 60 days.
The company’s expected earnings growth rate for the current year is 50% compared with the Tobacco industry’s estimated rally of 10.7%. The stock has outperformed the broader industry in the year-to-date period (+47.6% vs -21.9%).
Global Water Resources, Inc. (GWRS - Free Report) owns, operates, and manages regulated water, wastewater, and recycled water utilities primarily in metropolitan Phoenix, AZ. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for earnings jumped 21.4% in the last 60 days.
The company’s expected earnings growth rate for the current year is 41.7% compared with the Utility - Water Supply industry’s projected rally of 13.9%. The stock has outperformed the broader industry so far this year (+2.9% vs -13.5%).
Clean Energy Fuels Corp. (CLNE - Free Report) provides natural gas as an alternative fuel for vehicle fleets in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for earnings increased 2% in the last 60 days period.
The company’s expected earnings growth rate for the current quarter is 60% compared with the Utility - Gas Distribution industry’s estimated rally of 6.4%. The stock has outperformed the broader industry so far this year (+75.9% vs +10.5%).
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