A significant source of concern in the markets recently has been an escalating U.S.-China trade war. What started as an attempt by the Donald Trump administration to force the Chinese to open their markets has turned into much more. Although some of the cheapest tech stocks could benefit, the high-technology industry in general will experience mostly negative impacts.
Apple (NASDAQ:AAPL) depends heavily on China to produce its iPhone and other popular products. Though Apple has received assurances that its manufacturers would not be affected, promises often get broken. Also, a trade war also dashes hopes that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) can break into this vast, lucrative market.
Further, if the trade war goes far enough, one has to assume the that ability for Americans to trade Chinese tech stocks such as Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU) and JD.Com (NASDAQ:JD) could be affected.
Despite the generalized harm resulting from such a trade war, these three among the cheapest tech stocks would likely benefit:
Cheapest Tech Stocks: Micron (MU)
Micron (NASDAQ:MU) has remained one of the cheapest tech stocks despite massive growth. In past memory cycles, Micron has enjoyed enormous profit growth as high demand for limited supplies of memory drove prices higher. That cycle always came to a calamitous end when other producers flooded the market with memory, driving both chip prices and MU stock down.
Micron stock commonly loses most of its value in such a scenario.
Tech investors have seen this movie before. Despite the current environment of high memory prices and outsized profits, MU stock trades at a price-to-earnings (P/E) ratio of just over 7. For MU to lose its classification among the cheapest tech stocks, investors need to see some assurance that high memory prices will remain more than a temporary phenomenon.
A trade war with China could offer such assurance. Last November, the increases in NAND memory prices came to a halt when unexpected shipments of memory from China arrived. Also hurt were Samsung and SK Hynix (whose stocks would also benefit if they traded on U.S. markets). A trade war removes a large competitor from the memory chip market.
Although the memory price cycle will remain in place, Micron will likely be able to maintain high prices on DRAM memory for a longer time if the government bars Chinese memory from the marketplace.
Cheapest Tech Stocks: Nokia (NOK)
As a Finland-based company, Nokia (NYSE:NOK) would not see heavy involvement in a U.S.-China trade war. In fact, by remaining neutral, it could serve both U.S. and Chinese markets no matter what happens in the trade war.
Further, NOK stock stands to benefit from the upcoming 5G upgrade. Since losing most of its mobile phone business to the smartphone market, Nokia has remade itself into a 5G equipment company. This places Nokia in a fortuitous position. Verizon (NYSE:VZ), AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS) each will spend tens of billions of dollars over the next few years to build a 5G network. A trade war with China means Huawei Technologies Co., Ltd. would gain very little of this business. With one major competitor out of the way, more of the business would likely go to NOK.
Moreover, since NOK stock has received little attention over the last few years, valuations remain low. Back in 2007, the stock almost reached $40 per share. Today, it trades at around $6 per share. Estimated 2018 earnings stand at 29 cents per share. This places Nokia’s forward P/E at just over 20, making it one of the cheapest tech stocks.
Analysts expect the company to earn 39 cents per share in 2019, taking the forward P/E for that year below 16. Given the need for 5G and its massive profit growth, NOK stock will benefit for years to come with or without a China trade war.
Cheapest Tech Stocks: Hubbell (HUBB)
Although it is becoming one of the cheapest tech stocks, Hubbell (NYSE:HUBB) stands as one of the less familiar names in the tech space. The Shelton, Connecticut-based firm manufactures electronics and electronic components. Their products are used primarily in construction, industrial and utility applications. They maintain an office and two manufacturing facilities in China. However, the vast majority of their operations remain in the United States.
A trade war means more manufacturing will have to occur in the United States. In this case, the needs of these manufacturing plants will depend on Hubbell products for a wide variety of needs related to telecom, equipment, and power systems.
Over the past few years, net income has remained flat. With or without a trade war, the company appears poised to improve its profit outlook. Annual profits, which came in at $5.53 per share in 2017, are forecast to rise to $7.08 per share in 2018. This brings the forward P/E of HUBB stock to around 14, making it one of the cheapest tech stocks. Wall Street expects a further increase to $7.82 per share in 2019.
The company attributes most of this growth to its acquisition of Aclara. Aclara specialized in metering technology and software. Sales from Hubbell’s Power Segment grew by 41% in the first quarter. The company credited the former Aclara with over 90% of that sales growth.
Bringing more manufacturing onshore would bolster this need. Still, no matter what happens in a looming U.S.-China trade war, HUBB stock stands in a strong position to continue increasing its profits.
As of this writing, Will Healy is long MU stock. You can follow Will on Twitter at @HealyWriting.
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