[Editor’s note: This story was previously published in February 2019. It has since been updated and republished.]
Is it finally over? Are China and the United States finally going to be able to come to trade terms both parties can live with? Nothing is ever certain in the current political environment. But both countries seem to have grown weary enough of the tariff war to seriously come up with a solution that takes the brakes off the global economy.
The next obvious question: What are the best stocks to buy now that China and the U.S. are starting to look like potential trade partners again, rather than trade foes?
The knee-jerk answer is the same companies that suffered the most when the trade war became a reality. But,the list doesn’t necessarily have to end there. The impact of tariffs has shaken things up on a fairly permanent basis, and some new players have slipped into more meaningful roles thanks to some rather serious shakeups in the trade landscape.
Here’s a rundown of nine of your best bets if China and the U.S. look like they’re going to ink a deal very soon.
Skyworks Solutions (SWKS)
It’s a bit off-the-radar, as its wares are found inside the world’s most popular consumer electronics with someone else’s logo on the outside. But, without Skyworks Solutions (NASDAQ:SWKS), your iPhone, Samsung Galaxy and other smartphones may not work quite as well as they do.
Although it has been tricky at times to figure out just how subject Skyworks is to the tariff war that may be winding down soon — in that it’s supposed to apply to finished goods and not components — such details haven’t mattered entirely. An estimated 83% of its revenue comes from Chinese customers. One way or another, the expanded trade war has created a problem that an end to the trade war could quell.
Truth be told, the rising costs of raw materials stemming from increased tariffs has been more bark than bite for Caterpillar (NYSE:CAT). Although the company didn’t comment on their fiscal impact in the fourth quarter, during the third-quarter recently-imposed tariffs only added $40 million worth of expenses. That’s roughly one-third of 1% of Q3’s revenue — more than absorbable.
That’s not to say the trade war isn’t taking a toll on the heavy equipment maker though. While Q4 sales grew everywhere else, revenue driven by the Asia-Pacific market during Q4 were down 4% year-over-year. Some analysts fear that a continued trade war could take an even bigger bite out of the bottom line this year.
Yet, it’s fear more than anything else that’s holding CAT stock back.
We’ll never really know for sure if the endeavor to unite Qualcomm (NASDAQ:QCOM) and NXP Semiconductors (NASDAQ:NXPI) was blocked solely to make a statement at the onset of new tariffs, or if China’s would have barred it under any circumstances. It would be naive, however, to believe the ruling wasn’t at least politically motivated.
Since then, surprisingly enough, Qualcomm has largely escaped the brunt of new tariffs. Its fiscal Q1 sales and earnings both fell year-over-year, but both also exceeded expectations as the company and its Chinese partners worked past usually contentious problems to find a royalty arrangement that all parties can accept.
The stock has thus far been non-responsive to the company’s success, with most investors likely fearing its relationships with Chinese partners are strained. If the rhetoric changes for the better though, that unmerited doubt could leave, and lift QCOM stock with it.
Tyson Foods (TSN)
It has been a largely overlooked victim of the trade war, not being nearly as sexy higher-profile tech names. The relatively few investors that watch or own Tyson Foods (NYSE:TSN), however, know the true depths of the problems the tariff war has created for the company.
Chief among those problems is the waning price of meat.
Mostly priced out of overseas market thanks to retaliatory tariffs, the United States is suffering from a glut of meat — and chicken in particular — that’s crimping market prices. The end result? Profit margins on chicken sales should roll in at only 6% this year, down from 2018’s 9.4%.
Tyson Foods has somewhat sidestepped the challenge by looking to acquire more international exposure. But, such dealmaking isn’t always as cheap or as effective as organic, home-grown growth that includes rekindled sales to overseas customers. An end to the trade war would facilitate just that.
Ford Motor Company (F)
To be clear, Ford Motor Company (NYSE:F) was fighting an uphill battle anyway, even before President Trump was elected. Automobile sales reached a cyclical peak in 2015, and the iconic carmaker’s stock actually topped out before that.
Nevertheless, tariffs on materials imported from China coupled with tariffs on vehicles exported to China has created a headwind the company just doesn’t need right now. In September of last year, CEO James Hackett suggested steel tariffs had already reduced the company’s profits by a total $1 billion just since going into place in 2018. Meanwhile, Q3 revenue from its China arm was lower by 15% year-over-year thanks to retaliatory tariffs.
Already sporting a rock-bottom, forward-looking price-to-earnings ratio of 7.1, even a half-hearted trade agreement could position Ford as one of the market’s best stocks to step into.
Ctrip.Com International (CTRP)
Online travel agents weren’t much of a need in China just a few years ago. But, global economic growth gave rise to a new level of consumerism there, growing paychecks to the point where a huge swath of new entrants into the country’s middle class could afford to travel.
No sooner had China’s middle-class consumerism reached full speed before tough tariffs slowed the country’s economic engine down last year. The nation’s consumer confidence, after peaking a year ago, has fallen substantially since then, as workers increasingly realize President Donald Trump wasn’t bluffing.
An end to the trade war could easily light a fire under Ctrip shares.
Deere & Company (DE)
While Caterpillar is the machinery company that’s made the most noise in response to new tariffs, farm implement outfit Deere & Company (NYSE:DE) is arguably a bigger victim. It’s also, however, better positioned to recover once the tariff war comes to a close.
The company is fighting not one war, but two.
On one front, it’s bearing the added cost of materials needed to manufacture tractors and pickers, while struggling to keep its wares affordable enough to China’s farms that need high-throughput farm equipment.
The second — and arguably bigger — hurdle Deere faces right now is diminished demand from U.S. farms that suddenly find themselves struggling to sell their goods overseas. The 25% levy China imposed on U.S. grown soybeans, for instance, has all but halted sales of U.S. soybeans there. Farmers aren’t interested in buying equipment that won’t at least pay for itself.
Add Walmart (NYSE:WMT) to your list of the best stocks to buy if and when the trade war finally cools off, for the obvious reason.
To its credit, the world’s biggest retailer has made a deliberate effort to procure and sell more goods made in the United States. There’s only so much inventory U.S. companies can supply though. For goods like luggage, vacuum cleaners, furniture and electronics accessories, China may be the only viable source. It has been estimated that as much as three-fourths of the merchandise sold in Walmart stores is made in China.
Thus far, the company has been able to navigate tricky tariff waters, keeping most prices at palatable levels. There’s no getting around the reality, however, that an end to the tariff war would be a huge relief to owners of WMT stock.
A. O. Smith (AOS)
Finally, A. O. Smith (NYSE:AOS) may end up being one of the biggest winners of an end to the increasingly nagging trade war.
It was already noted that the rise of middle-class consumerism in China proved to be a boom for Ctrip, but the nation’s cultural shift didn’t end there. For some of China’s residents, better-paying jobs meant growing demand for water heaters. For some families, it was their first hot water tank.
Nevertheless, the company fears a prolonged trade war could increasingly weaken results. CEO Kevin Wheeler added to the organization’s 2018 report “Assuming relatively flat consumer demand in 2019 and without the impact of the previously disclosed channel inventory build we experienced in 2018, which we estimate was at least 5 percent of 2018 China sales, we project China sales will decline by 3 to 6 percent in 2019 in local currency terms and 7 to 10 percent in U.S. dollar terms.”
An amicable end to the trade spat, of course, would turn that headwind around.