The stock market’s nemesis recently has been escalating trade war tensions between the U.S. and China.
Every time the market has a good day, some wild card emerges in the U.S.-China trade war saga, and that wild card weighs on stocks. Most recently, the wild card was U.S. President Donald Trump threatening to slap a 10% tariff on an additional $200 billion worth of Chinese imports.
Stocks far and wide are dropping sharply in response to that news.
But, beyond the noise, the sell-off is actually creating a golden buying opportunity in a lot of really good stocks. By and large, the fundamentals in the stock market remain strong. Growth is healthy. Consumer strength is robust. Inflation isn’t a problem. Valuations are reasonable.
Thus, the game-plan for investors during recent trade war inspired turbulence should be as follows: Stay the course, and use the weakness to buy the dip in some names that are entering deeply undervalued territory.
With that in mind, here’s a list of four trade war stocks I’m buying amid recent broad stock market weakness.
Trade War Stocks to Buy: Facebook (FB)
At the top of this list is a company whose operations will hardly be affected by anything that happens between the U.S. and China.
Facebook (NASDAQ:FB) operates the world’s most used social media platforms. Everyone knows that there are 2.2 billion users on Facebook. But there are also 1.5 billion users on WhatsApp, 1.3 billion users on Messenger and 1 billion users on Instagram.
Will any of those users use any of those apps less frequently as a result of escalating U.S.-China trade tensions? No.
By the same token, will advertisers reduce their spend on those apps? No. Ad dollars follow users. If usage remains high, ad spend will remain high.
Thus, Facebook is financially unaffected by whatever takes place between the U.S. and China. But FB stock, which is a very reasonably valued stock at just 26-times forward earnings, has dipped as a result of trade war tensions.
That doesn’t make sense. The Facebook growth narrative, between improving the Facebook app experience and more deeply monetizing Instagram, WhatsApp and Messenger, is as good as it has ever been. As such, recent weakness is a clear buying opportunity.
Trade War Stocks to Buy: Alibaba (BABA)
One of the biggest trade war losers has been Alibaba (NYSE:BABA). The e-retail and cloud giant, which has long been the face of booming China consumerism, has seen its stock drop from $210 to below $190 over the past several weeks.
Does the drop make much sense? No. Much like Facebook, Alibaba’s growth narrative isn’t all that negatively affected by U.S.-China trade tensions. The company operates an e-retail marketplace in Asia that is second to none. That business won’t be materially affected unless these trade war tensions spill into an economic recession in China, and that is unlikely. The same is true for the company’s cloud business.
The trade tensions do pose a risk for Alibaba’s growth potential in the U.S. But, that is a long-term growth narrative. And in the long-term, U.S.-China trade relations will improve and Alibaba will likely be able to do open and free business in the U.S.
Meanwhile, Alibaba stock now trades at just 29-times forward earnings. On its face, that is a big multiple. But considering that Alibaba reported 60% revenue growth last quarter, the 29-times forward multiple looks rather anemic.
Overall, assuming present trade war tensions don’t result in an economic recession in China, then BABA stock is a compelling buy on this recent downdraft.
Trade War Stocks to Buy: JD.Com (JD)
As it relates to trade war tensions, the story at JD.com (NASDAQ:JD) is the same as the story at Alibaba. Trade war tensions have caused JD stock to fall off a cliff recently. But such fears related to a trade war outbreak are overstated, mostly due to the fact that these tensions are short-term in nature and won’t inflict lasting damage to the Chinese economy
Because of this, JD’s operations in the big picture should be largely unaffected by whatever takes place between the U.S. and China.
Beyond trade war risks, JD stock has been weak in all of 2018 thanks to the company’s profitability problems. Namely, the company is investing big in order to grow its retail business internationally, improve its supply chain and logistics network through automation, and enhance overall operations with AI technology. These big investments come at a cost, and overall profitability has dwindled as a result.
This is a concern for some. But not for me. JD is simply following the rules of the New Economy, which have clear precedents in the form of Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). JD will invest big now to grow market share. Then, once the company has successfully captured that market share, big investments will peel back and profit margins will roar higher on a much larger revenue base.
I don’t think the big rally in JD stock will happen until the profit engines turn on. I’m not sure exactly when that will happen. But, the $35-36 range has historically served as a strong support for this stock.
Right now, JD trades at $37. Thus, buying now for a rally back to the low-to-mid $40’s seems like a good move.
Trade War Stocks to Buy: Apple (AAPL)
As the biggest company in the world, Apple (NASDAQ:AAPL) naturally has some exposure to escalating U.S.-China trade war tensions. Namely, many of Apple’s products are made in China. Thus, a big tax on a few important technology components could really disrupt Apple’s entire supply chain.
But, such tariffs likely won’t come to fruition. And if they do, they will almost surely be short-lived. Why? Because any tariff of that nature will really hurt the U.S. consumer, because Apple and others will have a tougher time getting their products to the U.S. consumer.
Therefore, any weakness on the hardware side of Apple’s business will be short-lived. And such weakness will likely be offset by strength in the company’s Services business, which is the true growth driver of Apple today. Apple has finally figured out a way to optimally monetize its massive ecosystem of iPhone, iPad and Mac users, and it is doing so through high-margin, recurring revenue subscription services.
With that long-term growth narrative still intact and a bunch of buybacks in the pipeline, Apple stock looks like a solid investment here at just 16-times forward earnings. The stock will be turbulent amid back-and-forth trade threats between the U.S. and China. But all the back-and-forth is just noise that doesn’t materially affect the company’s long-term growth narrative.
As of this writing, Luke Lango was long FB, BABA, JD, AMZN and AAPL.
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