Welcome back, volatility. From the beginning of June to the end of July, the S&P 500 climbed to all-time highs. It did so without ever retreating more than 2%. Now stocks have dropped more than 5% in just a few trading days. Why? The market received bad news in back-to-back days with regards to the only two things investors care about.
First, the Fed “only” cut rates by 25 basis points. They also signaled a more hawkish-than-expected tone regarding future rate cuts. Second, U.S. President Donald Trump upped the trade war ante the very next day. He implemented a 10% tariff on $300 billion worth of Chinese goods that, up until early August, had simply been talk.
I get why markets are plunging in response to these two downward catalysts. I also think that stocks will bounce back soon. Trump wants lower rates. The easiest way for him to force the Fed to cut rates is to up the trade war. So he did just that. Now, the Fed is going to cut rates. That will normalize the yield curve by dragging down the short end.
At the same time, the 10-Year Treasury yield will remain below 2% because of muted inflation. That’s ideal for the stock market since it supports higher equity valuations. Further, once rates get cut, it’s very likely that we get some good news on the trade war front (both because Trump will have what he wanted in lower rates and because this trade war follows a rather predictable cycle).
Thus, today we have a sharply inverted yield curve with the threat of sizable tariffs on the horizon. By the end of 2019, though, we will most likely have a normalized yield curve with tariff threats reduced. The 10-Year Treasury yield will also likely be below 2%. That’s a recipe for materially higher stock prices.
Consequently, I think this late summer dip in stocks is a buying opportunity into the end of the year. Which stocks am I buying in particular? Here’s a list of 10 stocks I think look good amid recent trade war weakness.
Stocks to Buy on the Trade War Dip: Adobe (ADBE)
% off 2019 Highs: 9%
Trade Exposure: Visual cloud giant Adobe (NASDAQ:ADBE) doesn’t have much trade war exposure. There is the risk that escalating trade tensions continue to drag on global economic growth, which may weigh on enterprise IT spend and could eat into Adobe’s growth trajectory. But, that is about as limited trade war exposure as you will find in the market.
Secular Growth Drivers: Adobe is supported by multiple secular growth drivers which should withstand trade war tensions. The first of these secular drivers is the enterprise pivot from on-premise to cloud solutions, which remains only about 20% complete. Due to the cost-saving advantages of cloud over on-premise, this should withstand the rising cost aspect of tariffs. The second secular driver is the global consumer pivot towards visual consumption. The world is becoming increasingly visual every day, and as it does, more enterprises are adopting Adobe’s visual cloud solutions to create visually compelling content that resonates with consumers. This pivot will not be disrupted significantly by trade war tensions.
Near Term Catalysts: Adobe just reported yet another double-beat earnings report which comprised robust revenue and profit growth. Thus, the growth trajectory here remains favorable. As it does, strong earnings reports will converge on a depressed stock, and spark a nice recovery rally in ADBE stock. Adobe is a stock to buy.
% off 2019 Highs: 11%
Trade Exposure: Digital advertising giant Facebook (NASDAQ:FB) has some trade war exposure as higher costs could pressure U.S. companies. Tariffs mean higher input costs for a lot of small- to medium-sized U.S. retailers and merchants. Many of those companies will not be able to pass on those higher costs to consumers. As such, they will have to absorb higher input costs. That will pressure margins. In response, some of those companies may reduce their ad budgets. If so, that would mean less ad revenue from these companies into Facebook.
Secular Growth Drivers: It’s unlikely Facebook gets hit much by this reduced ad spend. Instead, if U.S. companies do reduce their ad spend in response to higher input costs, they will likely reduce spend on smaller ad platforms, like Yelp (NYSE:YELP). They almost certainly won’t cut Facebook or Instagram ad spend. And that speaks to this company’s secular advantage — it’s unparalleled size and reach among the global consumer. So long as this advantage remains in play, and so long as ad dollars continue to shift into the digital channel — which they should given increases in digital content consumption — Facebook’s secular growth trajectory will remain robust, regardless of trade war noise.
Near Term Catalysts: Facebook just started pushing forward on the e-commerce front. As relatively nascent e-commerce businesses like Instagram Shopping gain traction over the next several quarters, investors will start to salivate over the long-term potential of the commerce growth vertical. This will lead to strong investor demand for shares of FB, which should ultimately push Facebook stock higher for the foreseeable future.
Electronic Arts (EA)
% off 2019 Highs: 17%
Trade Exposure: Video game publisher Electronic Arts (NASDAQ:EA) has very limited exposure to the trade war since the video game industry has been largely exempt from tariffs, and projects to remain so for the foreseeable future.
Secular Growth Drivers: There are three big secular growth drivers supporting EA stock, all three of which will withstand and outlast trade war noise. First, the sleepy video game industry is on the verge of a huge leap forward with the 2020 release of next-gen consoles — the first in eight years — and the 2019/2020 release of cloud gaming platforms. Second, EA has successfully jumped into the “free-to-play” arena with Apex Legends and is set to win big as free-to-play games gain traction over the next few years. Third, EA’s portfolio line-up, including Madden and NBA Live, is optimally positioned for eSports. As eSports continue to grow over the next few years, EA should be at the center of all that growth.
Near Term Catalysts: Over the next few quarters, it’s all about cloud gaming, new consoles, and Apex Legends for EA stock. The release of cloud gaming platforms in late 2019 should breath life back into the stale video game industry. New console releases in 2020 should build on that momentum, and supercharge growth across the whole industry. Meanwhile, EA’s second iteration of Apex Legends has been a big success so far. As such, this company’s numbers will significantly improve over the next few quarters, and as they do, EA stock will bounce back, making this a stock to buy.
% off 2019 Highs: 22%
Trade Exposure: Payments processor Square (NYSE:SQ) has some exposure to the trade war, but it is largely limited to increased input costs for its hardware devices, which represent an increasingly small and unimportant part of Square’s overall revenue and profit pie.
Secular Growth Drivers: The secular growth driver supporting SQ stock is the global pivot from cash to cash-less payments, which has been happening rapidly and will continue to over the next several years, regardless of how the trade war plays out. The bigger the trade war gets, the less consumers spend, and the slower Square grows. But, the cash-less movement will remain robust, so regardless of how broader consumption trends play out, Square’s secular growth driver will remain strong.
Near Term Catalysts: SQ stock is down recently because the company gave a weak guide shortly before the market started to tank. The two compounded on each other, and Square stock now finds itself in bear market territory. But, management is notorious for “sandbagging” guidance. Thus, Q3 numbers will likely come in much better than expected. If that happens, you will have a double-beat report converging on a depressed stock, which should result in a big rally for SQ stock the next time earnings roll around.
% off 2019 Highs: 10%
Trade Exposure: Of all the stocks to buy on this list, Lululemon (NASDAQ:LULU) arguably has the most trade war exposure, since nearly 60% of the company’s products are manufactured in South East Asia, with 12% manufactured in China. Thus, bigger tariffs mean higher costs, and presumably lower margins.
Secular Growth Drivers: There are two secular drivers supporting LULU stock. One, athletic apparel adoption rates are soaring across the world, since consumers are increasingly obsessed with looking good, being healthy, and leading active lifestyles. Two, Lululemon dominates the high-quality niche of this secular growth athletic apparel market, and as such, has exceptionally high consumer demand and brand equity. This will enable the company to weather the trade war by passing higher costs onto consumers without adversely impacting demand. Revenues and margins should remain on a steady uptrend for the next several years, regardless of trade war noise.
Near Term Catalysts: The market is presently underestimating the secular strength of the athletic apparel market, and Lululemon’s ability to pass higher costs onto consumers without adversely impacting demand. As such, while investors are expecting next quarter’s profit numbers to come in lighter than expected, they won’t. Instead, it will be yet another double beat quarter, the likes of which will converge on a relatively depressed LULU stock to spark a big rally.
% off 2019 Highs: 23%
Trade Exposure: Chip giant Qualcomm (NASDAQ:QCOM) has plenty of trade war exposure, since at its core, this is a smartphone company, and the core of the smartphone growth narrative is the rapid urbanization of developing economies, the biggest of whom is China. Thus, rising trade tensions could impact global smartphone demand, which could have an adverse impact on Qualcomm’s numbers.
Secular Growth Drivers: The bigger story — and more important growth driver — at Qualcomm is the mainstream and widespread roll-out of 5G smartphones in 2020. Much like next-gen console releases in 2020 will breathe life back into what has become a stale video game industry, 5G smartphone releases in 2020 will similarly breathe life back into what has become a stale and tired global smartphone industry. This reinvigorated growth will power strong results for Qualcomm over the next several years, which should keep QCOM stock on a long term winning trajectory.
Near Term Catalysts: See above. It’s all about 5G, and 5G smartphones will start to roll out in 2020. Ahead of that big catalyst, you will likely see investors buy into QCOM stock, especially if trade tensions cool off.
% off 2019 Highs: 11%
Trade Exposure: Digital ad giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), much like Facebook, has exposure to the trade war through reduced ad spend as tariffs force U.S. companies to potentially re-think ad budgets.
Secular Growth Drivers: The secular growth drivers here are two-fold, and are the same as Facebook’s secular growth drivers. One, consumers are only spending more time in the digital channel, so ad dollars will continue to pivot in bulk into that space. Two, Alphabet is the biggest player in the digital ad space with the most reach, so even if U.S. companies do start to re-think their ad budgets, they likely won’t reduce spend on Alphabet’s platforms. On top of all that, Alphabet’s cloud business is supported by secular cloud adoption tailwinds which won’t be impacted in any big way by trade issues.
Near Term Catalysts: Alphabet just reported a really strong second quarter earnings report wherein revenue and profit growth accelerated sequentially, powered by increasing cloud momentum and improving margin performance. GOOG stock popped big in response to that report. It has since given up all of those gains because of macro headwinds. These macro headwinds won’t stick around. Once they disappear, investors will look back at the Q2 earnings report and say, “hey, that was a pretty good print.” They will consequently buy back in, and GOOG stock will turn back higher.
% off 2019 Highs: 18%
Trade Exposure: Cloud communications company Twilio (NASDAQ:TWLO) has essentially zero direct trade war exposure, although it could be negatively impacted by a global economic slowdown as a result of escalating trade tensions.
Secular Growth Drivers: The secular growth narrative at Twilio is all about cloud communications. Real-time communication is becoming an increasingly important part of the consumer experience. That is, in order to enhance their experiences, enterprises are increasingly employing real time communication. Twilio enables this real time communication. As real time communication becomes the norm in consumer experiences over the next several years, every company will adopt these services. Many of them will adopt Twilio, since they are the leader in the market. Nothing about this secular growth narrative is adversely impacted in the long run by trade tensions.
Near Term Catalysts: Twilio just reported a double beat-and-raise earnings report which topped expectations everywhere. Q2 revenues and profits beat estimates. The Q3 revenue and profit guides were above-consensus, too. The FY19 revenue and profit guides were lifted to above-consensus marks. Despite this strength, TWLO stock is down big since that report. Why? Macro noise. This macro noise will fade. When it does, the company’s strong internals will move back into spotlight. That transition should propel a nice rebound in TWLO stock over the next few months, especially if rates remain depressed (and if the Fed cuts rates further).
Canopy Growth (CGC)
% off 2019 Highs: 40%
Trade Exposure: Cannabis giant Canopy Growth (NYSE:CGC) has limited exposure to the U.S.-China trade war. However, the worry here is that tariffs are the new norm everywhere. If so, Canadian-based Canopy Growth could have a tough time expanding globally.
Secular Growth Drivers: The secular growth narrative is that Canopy is the unchallenged leader in a cannabis market that while small today, projects to be huge at scale, given underlying consumption trends which show marijuana’s popularity is huge and growing. Trade disputes impact this narrative to the extent that they might stifle Canopy’s international growth prospects. But, it seems like a leap to assume that tariffs are the new global norm. Anything short of that, it’s tough to see Canopy’s secular growth narrative being derailed by trade.
Near Term Catalysts: Canopy’s numbers last quarter weren’t good. In fact, they were bad enough that the CEO got fired. Next quarter’s numbers should be a lot better. Canadian cannabis volume trends have improved significantly over the past few months. Peer Aphria (NYSE:APHA) also reported strong numbers which underscore that things are getting better. Further, cannabis 2.0 products like vapes and edibles are set to launch in Canada later this year. The launch of these products should provide meaningful revenue and margin tailwinds for Canopy. Net net, the numbers over the next few quarters should improve dramatically, and spark a big rebound in CGC stock.
% off 2019 Highs: 22%
Trade Exposure: Chinese commerce giant Alibaba (NYSE:BABA) has a ton of trade war risk. Most importantly, Alibaba goes as the China consumer economy goes. That consumer economy has weakened as trade tensions have risen. If trade tensions keep going up, China’s consumer economy could keep slowing. If so, Alibaba’s once super robust growth trajectory will continue to flatten out.
Secular Growth Drivers: The long term fundamentals underlying BABA stock are highly favorable. What you have in China is a consumer economy with well over 1 billion consumers, less than 60% of whom are connected to the internet. In developed economies like the U.S. and Canada, the internet penetration rate is essentially north of about 90%. Thus, China has ample runway to add hundreds of millions new internet-connected consumers over the next several years. All those consumers will flow into the Alibaba ecosystem, since Alibaba is the de facto e-commerce platform in China. Against the backdrop of this secular growth narrative, current trade war noise is just a bump in the road.
Near Term Catalysts: It’s tough to point to a catalyst on the horizon for BABA stock. The reality is that, so long as trade tensions remain hot between the U.S. and China, BABA stock will remain weak. Thus, buying the dip here require patience. Long term, such patience will be rewarded. This stock has tremendous growth potential in a multi-year window. Alibaba just has to move past near term trade issues in order to realize that long term potential.
As of this writing, Luke Lango was long ADBE, FB, EA, SQ, LULU, QCOM, GOOG, TWLO, CGC, and BABA.