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4 Top Winners From the US-Mexico Trade Deal

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The United States recently reached an agreement with Mexico for a new trade deal. It is called U.S.-Mexico trade pact and will rewrite NAFTA, which also includes Canada. The announcement lifted the broader markets that have for quite some time been weighed down by trade conflicts.

U.S. auto and parts makers, in particular, recorded even bigger gains as the deal gave American plants an upper hand over Mexican facilities, where workers earn far less. Railroads also gained as the trade deal eases the risks of big tariffs, thus, offering smooth cross-border transportation services. Given the positives, investing in solid domestic automakers and railroad companies seems judicious.

US-Mexico Trade Agreement

The United States and Mexico reached a deal to change parts of the NAFTA, the trade agreement that Trump finds unreasonable. US Trade Representative Robert Lighthizer said that the deal requires 75% of parts in a car traded in North America to be sourced from the United States or Mexico. This is higher than the current 62.5% of the parts needed to be produced in the United States, Mexico or Canada.

The deal also requires around 40% to 45% of parts in cars sold to be manufactured by workers earning at least $16 UDS an hour. The agreement is intended to last nearly 16 years and will be reviewed every six years.

The deal however raises concerns about whether Canada, the third country in NAFTA, will agree to the amendments. Nonetheless, Lighthizer said that the pact was “absolutely terrific” and would surely modernize a trade agreement that had “gotten seriously out of whack.” He remained optimistic that the Congress would approve the deal with broad bipartisan support.

Canadian Minister of Foreign Affairs Chrystia Freeland added that “progress between Mexico and the United States is a necessary requirement for any renewed NAFTA agreement” and that “Canada is encouraged by the continued optimism shown by negotiating partners.”

Markets Hit an All-Time High

Investors seem to be shouting approval for the new trade deal. After all, the Trump administration had imposed series of tariffs and other protectionist measures against several of its key trading partners, raising concerns about a global trade war, which in turn may derail economic growth and squeeze corporate profits.

Both the S&P 500 and Nasdaq closed at an all-time high for a second straight session on Aug 27, with the Nasdaq trading above the coveted 8,000 mark. This marked the second 1,000 point advance for the tech-laden index this year, something that has not happened since 1999. The Dow also exited its correction phase for the first time in more than six months, finishing its longest correction period since the 223-session run in 1961, per Dow Jones Market Data.

Auto Stocks Rev Up

Shares of U.S. auto and parts manufacturers surged the most on news that the United States and Mexico have reached a tentative deal to update the 25-year old NAFTA. General Motors Company (GM - Free Report) shot up almost 5% and Ford Motor Company (F - Free Report) jumped more than 3%. Both these stocks are now rebounding from a two-month downtrend.

But, what led to the rally in domestic auto shares?  This was largely backed by the deal’s allowance of import tariffs on cars, trucks and their parts if manufacturers do not get bulk of their content from the NAFTA region, or use a significant number of workers who earn handsomely. The latter provision, in fact, will further compel car makers to push for more of their production into the United States from the lower wage Mexican plants.

Railroad Stocks Gain Steam

Top rail stocks also scaled higher on the trade agreement as it eased the effects of big tariffs on Mexico that could disrupt supply chains and rail shipments all through North America.

Shares of Kansas City Southern (KSU - Free Report) climbed 4.7% to end at 119.04 and successfully broke out of a flat base with a 115.01 entry point earlier this month. Rail giant Union Pacific Corporation (UNP) increased 1.8% to 152.78 and broke out of a flat base last month with a 148.43 entry point. Canadian Pacific Railway (CP - Free Report) and Canadian National Railway (CNI - Free Report) also rallied on the deal news, up 1.7% and 2%, respectively.

4 Top Picks

Banking on such positives, investing in the stocks from the mentioned sectors seems prudent. We have, thus, selected four stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Advance Auto Parts, Inc. (AAP - Free Report) is a leading automotive aftermarket parts provider in North America. It provides automotive replacement parts, batteries, accessories, and maintenance items for domestic and imported cars, vans, sport utility vehicles, and light and heavy duty trucks. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 1.9% in the last 60 days. The company’s projected growth rate for the current year is 28.9%, while the Automotive - Retail and Wholesale - Parts industry is projected to rise 21.2%.

AutoZone, Inc. (AZO - Free Report) is the nation's leading retailer and distributor of automotive replacement parts and accessories with stores in the United States and Mexico. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has advanced 0.5% in the last 90 days. The company’s projected growth rate for the quarter is 17.7%, while the Automotive - Retail and Wholesale - Parts industry is estimated to rise 16.9%.

O'Reilly Automotive, Inc. (ORLY - Free Report) engages in the retail of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 2.2% in the last 60 days. The company’s projected growth rate for the current year is 34.1%, while the Automotive - Retail and Wholesale - Parts industry is likely to rise 21.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

CSX Corporation (CSX - Free Report) provides rail-based transportation services in the United States and Canada. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has jumped 9.8% in the last 60 days. The company’s projected growth rate for the current year is 56.1%, while the Transportation - Rail industry is expected to rise 23%.

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