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Think Small As U.S.-China Trade War Breaks Out! 5 Top Picks

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The United States and China have imposed tit-for-tat tariffs on each other’s imports, with Beijing accusing the United States for triggering the ‘largest scale trade war’. Corporates, undoubtedly, are fretting over the risks a trade war will pose to their earnings.

However, small-capitalization stocks remain fairly immune due to their high domestic exposure in terms of revenue generation. Thus, investing in sound small caps seems sensible for now.

Tit-for-Tat Tariffs Open Trade War

President Trump has slapped tariffs on $34 billion worth of Chinese imports, delivering on his promise to his political supporters. The goods in discussion include farming plows, airplane parts and semiconductors.

This is the first time that the United States has levied tariffs on Chinese goods following months of warnings from Trump to Beijing demanding a change in its unfair practices with respect to technology and innovation. Trump has, in fact, upped the ante, by saying that the United States may eventually impose tariffs on more than $500 billion in Chinese imports or nearly the total amount of U.S. imports from China last year, should Beijing retaliate against the scheduled actions.  

But, the Chinese customs bureau had earlier said that it would impose tariffs on American products immediately after U.S. tariffs come into effect. And that’s exactly what they did. China also slapped tariffs on $34 billion of U.S. imports. A commission of China’s State Council said that it applied tariffs on 545 products “including agricultural items, vehicles and aquatic products,” per state-run Xinhua News Agency. President Xi has already informed its government to get ready for a full-fledged trade war with the United States, according to Chinese officials.

Escalation of Trade War Will Hurt U.S. Most

The direct impact of trade conflict on China’s economic growth is expected to be limited between 0.1% and 0.3% this year, per economist estimates. Liang Hong, chief economist at CICC, added that the Asian nation’s intension to open up its market “can stay on course”, while the economic growth target of 6.5% for this year is within reach.

The U.S. economy, in the meanwhile, is expected to take more beating. After all, U.S. levies in turn will affect American firms with investments in China. Planned U.S. tariffs on Chinese goods will hurt companies around the globe since $20 billion of the $34 billion goods targeted are those of foreign companies, mostly owned by Americans.

Bank of England governor Mark Carney said that U.S. economic growth could be hit by as much as 5% in the event of a trade war, while the world economy will take a hit of just over 1%. And why not? The world’s largest economy would be affected the most as it is “pursuing trade wars on multiple fronts, including its disagreements with Canada and the European Union” DBS said in a note.

DBS added that “in each skirmish the U.S. targets different economies and consumers, but the retaliation from each counterpart falls on the same group of American consumers and businesses. The reckoning is in the pipeline, in our view.”

Trade War Escalates! Invest In Domestic Producers

But there are some companies that might benefit from the rising U.S.-China trade tensions. Among such companies are domestic producers of goods. Due to their limited international exposure, they offer higher protection than their large- and mid-cap counterparts against any economic upheaval. These stocks also have solid growth narratives as their promising outlook remains unfazed by the change in tariffs.

We have, thus, selected five such stocks that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

First Financial Northwest, Inc. (FFNW - Free Report) operates as the holding company for First Financial Northwest Bank that provides commercial banking services in Washington. The stock currently has a Zacks Rank #1 and a VGM Score of B. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings jumped 21.5% in the same period. The company’s expected earnings growth rate for the current year is 77.5% compared with the Banks - West industry’s estimated rally of 25.1%.

Northern Oil and Gas, Inc. (NOG - Free Report) engages in acquisition, exploration, exploitation, development, and production of crude oil and natural gas properties in the United States. The company has a Zacks Rank #1 and a VGM Score of A. In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings climbed 33.3% in the same time frame. The stock’s expected growth rate for the current year is 157.1% versus the Oil and Gas - Exploration and Production - United States industry’s projected rally of 21.7%.

Echo Global Logistics, Inc. (ECHO - Free Report) provides technology-enabled transportation and supply chain management solutions in the United States. The company has a Zacks Rank #1 and a VGM Score of A. 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 4.3% in the same period.  The stock’s expected growth rate for the current year is 69.8% versus the Transportation - Services industry’s estimated rally of 14.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

RCI Hospitality Holdings, Inc. (RICK - Free Report) engages in the hospitality and related businesses in the United States. The company has a Zacks Rank #2 and a VGM Score of B. 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 8.5% in the same period. The stock’s expected growth rate for the current year is 52.5% versus the Leisure and Recreation Services industry’s projected rally of 17.9%.

Covenant Transportation Group, Inc. (CVTI - Free Report) provides truckload transportation and brokerage services primarily in the continental United States. The company has a Zacks Rank #1 and a VGM Score of A. In the last 60 days, four earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings advanced 9.4% in the same period.  The stock’s expected growth rate for the current year is 134.5% versus the Transportation - Truck industry’s estimated rally of 45.4%.

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