China and the U.S. are moving closer to a comprehensive trade deal, with Treasury Secretary Steve Mnuchin saying that “a trade war is on hold” and China apparently making numerous concessions to the U.S..
Some of these concessions have already been announced by Beijing. Others have only been mentioned as likely by the U.S under any deal. But since China is the world’s second largest economy and it does look set to make meaningful concessions to the U.S., it’s definitely worthwhile for investors to buy stocks that are likely to benefit from the emerging trade deal between Washington and Beijing.
The energy and agricultural sectors in general, and Cheniere Energy, Inc. (NYSE:LNG), Chesapeake Energy Corporation (NYSE: CHK), Deere & Company (NYSE: DE) and Monsanto Company (NYSE: MON) in particular, look very well-positioned to benefit tremendously from a U.S.-China trade deal.
Here’s a closer look:
Energy: Cheniere and Chesapeake
Mnuchin told CNBC on May 21 that “in energy, I think there’s a opportunity for the U.S. to become a major supplier … to China,” adding that “they have incredible amounts of demand at these prices for our shale and our liquid natural gas.” According to Mnuchin, the U.S. “can easily” export $40 billion to $50 billion “of energy” to the Asian country.
Cheniere Energy owns the Sabine Pass terminal on the border of Texas and Louisiana which exports natural gas abroad. It is extremely well-positioned to benefit from increased U.S. exports of natural gas to China because it recently “signed the first-ever, long-term deal between an American natural gas exporter and a Chinese state-owned energy company,” CNBC reported. Also worth noting is that Sabine Pass is one of only two “fully operational LNG export terminal” in the continental U.S., while the other is located far away in Maryland.
Two other terminals are slated to become operational in the Gulf Coast area in coming months, but with its existing deal with China and its current exclusive position on the Gulf Coast giving it a first-mover advantage, Cheniere Energy and Cheniere Energy stock are clearly poised to benefit tremendously from increased Chinese imports of natural gas from the U.S. Finally, Cheniere is in the process of developing an additional Gulf Coast liquefied natural gas export terminal in Corpus Christi, Texas.
As this Seeking Alpha author points out, using a third-party source, Chesapeake Energy as of last year was the second largest producer of natural gas in the U.S., behind only Exxon Mobil Corporation (NYSE: XOM). Moreover, Chesapeake has significant natural gas production facilities in the Eagle Ford Shale Play in South Texas and the Haynesville Shale located in southwestern Arkansas, northwest Louisiana and East Texas. Both are relatively close to Cheniere Energy’s current export facility at Sabine Pass and its future export facility in Corpus Christi. Importantly, Chesapeake has said in the past that it is willing and able to export liquid natural gas.
Finally, Chesapeake stock is very cheap, as the forward price-to-earnings ratio of Chesapeake stock is around 7 and its price to sales ratio is only 0.43, while the company’s business is benefiting from rising oil prices.
Ag Products: Deere and Monsanto
President Trump said that China would buy “massive amounts” of U.S. farm products under the pending trade deal between the U.S. and China. According to the president, a trade deal between the countries “would be one of the best things to happen to our farmers in many years.”
Of course, massive increases in the amount of U.S. agricultural products exported to China would greatly increase the revenue and profits of both Monsanto — which makes seeds and herbicides — and Deere, which manufactures farm machinery. That’s because as farmers’ income increases, they are able to afford more new products from both companies.
More importantly, their need for such products will increase as they grow more crops to meet the higher demand from China. As a result, both Deere stock and Monsanto stock should get a big boost from a U.S.-China trade deal.
As of this writing, Larry Ramer did not own shares of any of the companies named.