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Forget Tariff Backlash on Telecom Sector, Bet on 5 Top Picks

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From the beginning of this week, President Donald Trump has intensified the ongoing trade war between the world’s two largest economies by imposing new tariffs on Chinese imports. The latest salvo includes 10% tariffs on about $200 billion worth of Chinese goods, which is likely to increase to 25% in January 2019 if Beijing refuses to offer trade concessions. The freshly levied tariff comes on top of a 25% tariff already imposed on about $50 billion worth of imports from China.

The U.S. Trade Representative had reportedly removed 297 items from an initial list released in July. However, a total of 5,745 Chinese goods will be impacted by the newly imposed tariffs that cover a wide array of goods including minerals used in manufacturing, vegetable juices, leather handbags, furniture and appliances among others.

In response, Beijing has taken a retaliatory tariff action. Chinese President Xi Jinping’s government has imposed taxes on 5,207 U.S. products, valued at about $60 billion. While products such as liquefied natural gas, coffee and various types of edible oil will see a 10% levy, 5% tax will be imposed on items such as frozen vegetables, cocoa powder and chemical products, hurting consumers’ wallet.

Trump’s hunt for fair and reciprocal trade, leading to a trade war with China, is aimed to protect America’s dominance and disrupt Beijing’s plan for technological and economic supremacy. However, the White House is downplaying the adverse impact of the tariff imposition on the Americans. Many economists are of the opinion that prices for the related goods will ultimately increase as manufacturers pass on the higher costs to customers, which may be a drag on U.S. GDP numbers in the long run.

US-China Telecom War

Talking about the telecom ecosystem, the impact on the industry is amplified by the timing, as the United States and China race one another to dominate the next generation of ultrafast wireless networks — 5G. The faster network will fuel the use of artificial intelligence in driverless cars and robotics and hasten the wide proliferation of smart cities among others. Companies have warned that the administration’s tariffs will undercut Trump’s stated plan to lead in those areas.

The tariff burden will make headwinds for tech and telecom companies that provide major network equipment that powers the Internet, mobile networks and data storage. With higher tariffs, U.S. customs will start levying additional charges on circuit boards, semiconductors, cell tower radios and modems among others made in China and exported to America.

The telecom sector has long outsourced production to low-cost countries like China, where manufacturing and assembly of products is relatively cheaper than in the United States. With increased tariffs in place, the move is likely to be counter-productive and domestic consumers are expected to face higher product costs as firms increasingly pass on the costs to avoid margin pressures.

Beat the Blues With 5 Top Picks

As the equity markets appear quite shaky due to the prolonged tariff battle, betting on some outperformers with favorable Zacks Rank and healthy fundamentals could be a great idea for investors. These stocks seem to hold great promise for the future and are likely to reward shareholders generously.

In order to benefit from the current market scenario, we have picked a handful of telecom stocks that have the potential to restore investors’ confidence.

United States Cellular Corporation (USM - Free Report) :

This Chicago, IL-based wireless telecommunications service provider offers postpaid and prepaid service plans with voice, messaging and data usage option services, smartphone messaging, data and Internet services across the nation. The company is a subsidiary of Telephone and Data Systems, Inc. (TDS). It remains bullish about the growing demand for smartphones, which enjoy a significant market penetration, supporting growth in data revenues. The stock has rallied 24.2% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 60.9% upward over the past 90 days. U.S. Cellular has beaten earnings estimates in each of the trailing four quarters, the average surprise being 340.4%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Verizon Communications Inc. (VZ - Free Report) :

Verizon expects healthy improvement in margins on the back of strong FiOS network and strategic services in the Wireline business. The telco currently carries a Zacks Rank #2 (Buy) and remains well on track to launch next-generation 5G superfast wireless residential broadband services in multiple U.S. markets in 2018. The stock of this New York-based telecom services provider has gained 8.3% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 1.5% upward over the past 90 days. Verizon surpassed earnings estimates twice in the trailing four quarters with an average positive surprise of 2.1%.      

SoftBank Group Corp. (SFTBY - Free Report) :

Through Domestic Telecommunications, the wireless carrier provides mobile communications and broadband services, and telecom services across the nation. The company currently sports a Zacks Rank #1. The stock of this Tokyo, Japan-based wireless carrier has gained 19.8% over the past year. The Zacks Consensus Estimate for the current-year EPS has remained flat over the past 30 days.

Liberty Latin America Ltd. (LILA - Free Report) :

Based in Denver, CO, the telecommunications services provider offers video, broadband Internet, fixed-line telephony and mobile services. The company offers communications and entertainment services to residential and business customers and business products and services. It currently carries a Zacks Rank #2. The stock has rallied 8.9% over the past six months.  The Zacks Consensus Estimate for the current-year EPS has been revised 38% upward over the past 90 days.

Orange S.A. (ORAN - Free Report) :

Orange provides a range of fixed telephony and mobile telecommunications, data transmission to consumers in Europe, Africa and the Middle East. The company currently carries a Zacks Rank #2. This Paris, France-based telecom provider has gained 4.6% over the past two years. The Zacks Consensus Estimate for the current-year EPS has been revised 1% upward over the past 90 days.

Moving Forward

Notably, 4G LTE deployment and network upgrades continue to be the key trend around the world, and in select markets there is also massive investment in fixed broadband based on fiber. Importantly, 5G developments have gained pace and will be a key area of focus in 2018 and beyond. In addition to technological advancements, product launches and deployment of 5G networks, core focus will be on how the industry adapts to the added set of tariffs — which could be a game changer for U.S. tech and telecom companies in the long run.

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