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Trump Slaps New Tariffs on Chinese Goods: 5 Small-Cap Picks

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On Sep 17, the Trump administration announced fresh tariffs on $200 billion of imports from China, escalating trade tensions. These tariffs will come into effect on Sep 24 and the rates levied will be stepped up from the beginning of 2019.

Further, any retaliation from China will attract more tariffs, which will end up covering nearly the total value of goods imported from that country. China has threatened to retaliate and the talks proposed by the U.S. Treasury Secretary later this month now look highly unlikely.

Equity markets are unlikely to take kindly to these developments. Betting on small caps makes sense at this point as these are likely to lose the least in this scenario. Their domestic focus and the fact that they will be the largest beneficiaries of tax cuts also make them strong investment options.

Trump Imposes Fresh Tariffs, Promises Further Measures

The Trump administration has decided to impose a 10% tariff on Chinese imports worth $200 billion, effective Sep 24. From Jan 1, 2019, the rate at which tariffs are levied will increase to 25%. In the event that China takes “retaliatory action against our farmers or other industries,” the administration will impose “tariffs on approximately $267 billion of additional imports.”

The idea behind raising duties in a phased manner was to allow companies to find other sources of inputs and provide relief to consumers ahead of the holiday season. A significant move was to exclude nearly 300 items from an earlier list of goods, which would attract such duties. This includes Apple Inc.’s (AAPL) smartwatches, bicycle helmets and car seats.

China Vows to Retaliate, Further Talks Unlikely

Anticipating the announcement of additional tariffs, China’s foreign ministry threatened retaliatory action earlier on Monday. Foreign ministry spokesman Geng Shuang said that if further tariffs were imposed on China by the United States, China would have “to take necessary countermeasures” and protect its “legitimate and legal rights and interests.”

The announcement also raises doubts over trade talks between the United States and China proposed by Treasury Secretary Steven Mnuchin. When asked if China’s vice premier Liu He would visit the United States to participate in talks, Mr Geng said China would only participate in such discussions “on the basis of equality.”  This round of talks now appears highly unlikely.

Our Choices

The imposition of fresh tariffs has significantly escalated trade tensions between the United States and China. Talks to resolve the situation also seem highly unlikely in the near future. Markets are unlikely to take these events in good light. In such a scenario, small caps could be the best bets.

This is because small caps could lose the least in the prevailing scenario, marked by geopolitical tensions and a surging dollar. 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.

UFP Technologies, Inc. (UFPT - Free Report) is a designer and convertor of foams, composites, plastics and natural fiber materials for the industrial and consumer markets in the United States.

UFP Technologies’ expected earnings growth for the current year is 69.6%. The Zacks Consensus Estimate for the current year has improved by 4.4% over the last 30 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%.The Zacks Consensus Estimate for the current year has improved by 8.1% over the last 30 days.

Bridgepoint Education, Inc. provides postsecondary education services in the United States.

Bridgepoint Education’s expected earnings growth for the current year is 8.5%. The Zacks Consensus Estimate for the current year has improved by more than 100% over the last 60 days.

Unisys Corporation (UIS - Free Report) is an IT firm, specializing in securing client operations, increasing efficiency of data centers, enhancing support to their end users and constituents, and modernizing their enterprise applications.

Unisys’ expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days.

Summer Infant, Inc. is a designer, marketer and distributor of branded durable juvenile health, safety and wellness products (for ages up to three years), which are sold principally to large U.S. retailers.

Summer Infant’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 50% over the last 60 days.

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