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Trade Deficit Widens at Fastest Pace in 3 Years: 5 Picks

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In July, the U.S. trade deficit jumped by its highest margin since 2015. In doing so, it reached its highest level in five months. Imports hit a record high even as exports of civilian aircraft and soybeans declined. The jump in the deficit is a sign of things to come, indicating that trade could dent growth in the quarters ahead.

The fall in exports, an outcome of countervailing duties in the wake of Trump’s protectionist measures, indicates that large firms with significant export component could find the going tough now.

Against this backdrop, it makes sense to invest in small-cap stocks. Their domestic focus and the fact that they will be the largest beneficiaries of tax cuts make them strong investment options.

Soybean, Aircraft Exports Fall

A report from the Department of Commerce released on Sep 5 reveals that the U.S. goods and services deficit increased from $45.7 billion in June by $4.3 billion to hit $50.1 billion in July. This is marginally higher than the estimate level of $49.1 billion. Incidentally, June’s figure was revised downward from the initial level of $46.3 billion.

July’s figure is the highest in the last five months. Exports declined by 1% to touch $211.1 billion, which is still near record high levels. A lower offtake of soybeans and passenger planes contributed to the decline. Imports increased 0.9% to a touch a record level of $261.2 billion.

Trump’s Policies Resulting in Higher Deficits

Notably, the trade deficit with China jumped 10% to hit a record level of $36.8 billion. According to Philip Levy, who has earlier served on President George W. Bush’s council of economic advisers, the Trump administration’s policies “may not have been designed to increase the trade deficit, but that is their effect.”

Meanwhile, Andrew Hunter of research firm Capital Economics believes this report indicates that net exports could reduce GDP levels in the second half of 2018. Analysts also feel that the final impact of Trump’s policies and retaliations from trading partners will possibly only be felt by the first quarter of next year.

Our Choices

The Trump administration’s protectionist policies are proving to be counterintuitive to their original goal of reducing the trade deficit. Retaliatory measures from trading partners are leading to a drop in exports even as imports hit record highs.

Large multinationals with significant export component could stand to lose in such conditions. In contrast, small caps would be the least affected, since they would be largely unscathed by shifts in trade deficit.  Their domestic focus and tax cuts are other factors working in favor. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

CONSOL Coal Resources LP (CCR - Free Report) is a producer and seller of high-Btu thermal coal in the eastern United States and the Northern Appalachian Basin.

CONSOL Coal Resources’ expected earnings growth for the current year is 57.2%.The Zacks Consensus Estimate for the current year has improved by 9.4% over the last 30 days.

Victory Capital Holdings, Inc. (VCTR - Free Report) is an investment management company which operates in the United States.

Victory Capital’s expected earnings growth for the current year is 21.4%. The Zacks Consensus Estimate for the current year has improved by 3.3% over the last 30 days.

Covenant Transportation Group, Inc. (CVTI - Free Report) is a truckload carrier that offers just-in-time and other premium transportation service for customers throughout the United States.

Covenant Transportation’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 7% over the last 60 days.

Rent-A-Center, Inc. (RCII - Free Report) is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.

Rent-A-Center’s expected earnings growth for the current year is more than 100%.

On Deck Capital, Inc. (ONDK - Free Report) is an on-line platform that uses a big data, analytic model to source, underwrite, and fund loans to small businesses.

On Deck Capital’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by more than 100% over the last 30 days.

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