As we start August, markets face fresh uncertainty as to how the trade wars will develop, what the Federal Reserve may do next and whether the tensions with Iran will keep heating up. Today, I am going to discuss three stocks that investors may consider selling or hedging: Apple (NASDAQ:AAPL), Baidu (NASDAQ:BIDU) and Boeing (NYSE:BA).
Stocks tend to behave differently in a falling market than they do in a rising one. The down moves can be rather fast in a declining market, and a momentum stock may become a falling knife. I personally do not like catching falling knives.
Investors may consider waiting on the sidelines if they do not currently have any positions open in AAPL, BIDU or BA stock. If they already own shares, they may either consider taking some money off the table, or hedging their positions. If we’re talking about hedging strategies, then covered calls or put spreads with Sep 20 expiry could be appropriate since straight put purchases are likely to be expensive due to heightened volatility.
With all of that in mind, let’s dive a little deeper into each of these stocks.
Stocks to Sell: Apple (AAPL)
Notable Risks: Profit-taking, trade wars, currency fluctuations and broader tech market weakness
Possible Price Range: $180-$210
However, volatility kicked in after the Fed interest rate decision the next day. Then, on Aug. 1, President Donald Trump announced more Chinese tariffs and AAPL stock took a beating. After all, China is Apple’s second-most important market. In Q3, $9.15 billion of Apple revenue came from this key region.
It’d be fair to say that Apple stock has now become a proxy for the trade wars between the U.S. and China. Almost 20% of Apple’s revenues come from China. In 2018 and so far in 2019, sales of iPhones in China have declined. In its Q3 statement, AAPL reported that sales in China were down 4.5% and there’s a good possibility that China’s economy will slow some more.
Furthermore, AAPL relies on Chinese suppliers, and its mobile devices are assembled in China. Thus, Apple would have to react to tariffs either by increasing prices in the U.S. or absorbing the cost of the tariffs. The latter action would definitely have a major negative impact on the price of Apple stock.
It is no wonder that whenever trade war headlines hit the wires, Apple stock price gets negatively affected. The further the signing of the trade deal gets pushed out, the greater the adverse effect on Apple’s future earnings and AAPL stock could be.
If AAPL’s sales, margins and revenue all decline in China amid increased competition from local companies including Huawei, and currency headwinds, then the multiple of Apple stock will drop.
Year-to-date, AAPL shares are up abut 30%. Not all investors are comfortable with the increased volatility levels in the stock. If you are a shareholder who has been able to ride the impressive rally since early January, then you may want to take some of your profits.
Notable Risks: Trade wars, questions about growth and broader tech market weakness
Possible Price Range: $90-$115
Baidu is expected to report earnings on Aug. 19. During the past year, the BIDU stock price is down over 30%. Its 52-week range has been between $97.77 and $234.88. Now, Baidu stock is hovering around $100. Clearly, the bears have taken control of the tape.
What is the main reason for the deterioration of Baidu’s market cap? Investors fear that the group’s growth narrative does not hold up any more.
BIDU has two sources of revenue:
- Internet advertising business (which is at the core); and
- Income from majority ownership in iQiyi (NASDAQ:IQ)
Baidu has over 70% of the Chinese online search market share. Until about a year ago, this leadership has meant growing advertising revenues and solid margins.
However, that is not the case anymore. Competitors like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) have been pressuring its business model and ad revenues. Many Chinese consumers are using apps that bypass browsers and thus Baidu’s search engine. In other words, BIDU stock’s desktop search business is being disrupted or even displaced.
Wall Street is not sure if management knows how to go after the challenge to Baidu’s core business. The company has increased spending to attract more advertisers, which in turn has affected margins.
Furthermore, as the Chinese economy slows down, all these companies chase the same advertisers, who have been scaling down ad budgets.
The second factor adversely affecting Baidu’s top-line growth comes from its ownership of iQiyi, the so-called Netflix (NASDAQ:NFLX) of China. Baidu still owns roughly two-thirds of iQiyi, so IQ’s results and its growth are reflected in Baidu’s consolidated numbers. And iQiyi stock is not making any money at this point, either.
And when you add the uncertainty around trade wars, it may just not be fashionable to buy BIDU shares in August, yet. Overall, the bull thesis supporting BIDU stock is falling apart. It would be important to analyze the next earnings report to see if Baidu stock has a better investment proposition for long-term investors.
Notable Risks: Trade wars, questions about 737 Max 8 aircraft and broader market weakness
Possible Price Range: $300-$335
As a manufacturer of commercial and defense products, Boeing is one of the most important names in many portfolios. On July 24, it released quarterly earnings of $2.92 per share, beating estimates. This quarterly EPS is lower than the earnings of $3.33 per share a year ago.
BA stock has had a difficult year, to say the least. Boeing shares have been falling since early March, when Ethiopian Airlines suffered a fatal accident involving a Boeing 737 Max 8 aircraft. The March 10 crash was, unfortunately, the second deadly incident of the same model plane, one of Boeing’s most popular, in less than six months.
In addition to the human cost of both tragedies, many of our readers should be familiar with the difficulties that have followed BA stock after the accidents. July 3, management announced a compensation plan for the survivors of the fatal crashes.
The Boeing 737 Max 8 is still grounded and the company does not know if or when the plane can be airborne again. Eventually, Boeing will have to foot the bill for the losses incurred by many airlines due to cancelled flights.
The ongoing U.S.-China trade war worries have also added to the BA stock price decline. The company has become one of the proxy names for the conflict. Over the past decade, the growth of China’s airline industry has created a massive export market for Boeing. In fiscal year 2018 alone, Boeing generated about $13.7 billion in revenue from world’s second-largest economy.
Boeing, along with its main competitor Airbus (OTCMKTS:EADSY), are the world’s two largest commercial aerospace manufacturers. Therefore, long term, I would not bet against Boeing.
However, short-term, things could be choppy and somewhat of a mixed bag. A couple of sour trade headlines or some Boeing 737 Max-related news in the next few weeks could drive BA stock further down toward the $300 level.
At the time of writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.