[Editor’s note: “7 U.S. Stocks to Buy With Limited Trade War Exposure” was previously published in June 2019. It has since been updated to include the most relevant information available.]
The global trade war is far from over. The U.S. and China have not yet made deal.
So long as this trade war hangs around, it will be a drag on financial markets.
But it won’t be a drag on every stock. Not every company has exposure to China, trade and tariffs. Some companies have little exposure to those things, and as such, won’t be weighed down as much by a trade war. They will continue to report solid and healthy numbers, and their stocks will rally in response.
So these are the stocks you want to buy for the foreseeable future, or so long as the trade war persists.
Which stocks fall into this category? Let’s take a closer look.
The great thing about Facebook (NASDAQ:FB) in the current environment is that you have a $70 billion services revenue business, growing at a 20%-plus rate, that is blocked in China. At the same time, FB stock trades at just 20-times forward earnings.
That’s a healthy combination that should power over-performance in FB stock so long as the trade war sticks around. To be sure, Facebook isn’t entirely exempt from the trade war. The higher tariffs go, the higher prices go for U.S. corporations. Most of those corporations can’t afford to pass price hikes onto consumers, so they will absorb the tariff hit. In order to offset that hit, they may look to cut down on spend, including cutting back the ad budget.
But, even if that happens, the Facebook ad budget likely won’t get cut. Smaller, more experimental ad channels, like Snap (NYSE:SNAP) or Pinterest (NYSE:PINS), could get hit. Facebook won’t, though, because it’s the tried-and-true digital ad channel.
All in all, then, Facebook is well isolated from trade war risks, and the business is still growing at a 20%-plus rate while the stock trades at a relatively cheap multiple considering that 20%-plus growth. Ultimately, that makes FB stock a good buy here.
Five Below (FIVE)
Retail is broadly a bad place to be during the trade war, since a majority of U.S. retailers source their product from countries with lower labor costs, with the biggest of those countries being China. As such, retailers are at the epicenter of tariffs on China imports.
But, discount retailer Five Below (NASDAQ:FIVE) is different from other retailers. First, this is a U.S.-focused retailer, so all of its sales happen in the United States. Second, this is a very strong and popular retailer, with comparable sales consistently running positive for several years. Third, this is a hyper-growth retailer, as the company is growing its store base by about 20% per year.
Fourth, and perhaps most importantly, Five Below has successfully leveraged price hikes and renegotiated supply contracts to offset the impact of tariffs. As a result, sales growth has remained healthy, margins have remained resilient and both of those dynamics project to persist for the foreseeable future.
In the big picture, then, FIVE stock is a good buy here because this is a super strong retailer that is successfully side-stepping tariffs.
American Electric Power (AEP)
The trade war promises to bring economic and financial market volatility. When economic and financial market volatility are on the rise, investors do two things: they hunt for stability, and they hunt for yield.
U.S. utility giant American Electric Power (NYSE:AEP) provides both of those things. American Electric Power is arguably one of the most stable public companies in America, as the company provides electricity services to millions of Americans, none of whom are going to stop paying for said electricity services anytime soon because they all need electricity to survive in the modern world. Meanwhile, AEP stock simultaneously offers investors a healthy 2.9% yield, which looks exceptionally attractive next to a depressed 10-Year Treasury yield and in the face of slowing corporate earnings growth.
All in all, AEP stock looks good here as a defensive play for risk-adverse investors looking to mitigate volatility and trade war exposure.
Much like Facebook, the great thing about Netflix (NASDAQ:NFLX) in the current environment is you have a hyper-growth services business that is blocked in China.
Netflix is at the epicenter of the secular growth, over-the-top video mega-trend, which is sweeping across the globe. As a result, Netflix is growing revenues at a robust 20%-plus rate, with rapidly expanding margins, too. Importantly, this growth narrative has zero exposure to China, since Netflix is outright blocked in China.
Overall, then, Netflix stock gives investors exposure to a secular, 20%-plus revenue growth story without any exposure to the volatile and trade-impacted Chinese market. Demand for that exposure will go up so long as the trade war sticks around. As such, so long as the trade war persists, so will the uptrend in NFLX stock.
Much like Facebook and Netflix, Alphabet is a 20%-plus growth internet company supported by secular growth tailwinds in global urbanization and digitization. At the same time, the company makes most of its revenues from its services businesses (digital ads and cloud), and very little revenue from the hardware businesses like Google Home. Also, Google search and YouTube — the two cores of Alphabet — don’t exist in China.
In other words, as is the case with Facebook and Netflix, Alphabet offers investors exposure to a secular, 20%-plus global internet growth narrative with limited trade, tariff and China exposure.
That is the exact type of exposure investors will flock to so long as the trade war persists, meaning that GOOG stock should fare well even in the face of rising trade tensions.
Sticking in the secular growth services theme, next up we have e-commerce solutions provider Shopify (NYSE:SHOP).
Shopify provides e-commerce solutions to retailers of all shapes and sizes, so that they can create online stores and have the tools to succeed in an omni-channel commerce world. This growth narrative has caught fire over the past several years as the sharing economy has gained mainstream traction, and as e-retail has become increasingly decentralized and democratized. This narrative projects to remain on fire, too, as Shopify still only accounts for a fraction of the global retail sales pie.
The trade war won’t impact this narrative at all. Even if tariffs go up a whole bunch, and retailers are looking at higher input costs, they won’t pull their Shopify spend. Why? Because Shopify is the platform that makes everything work for these retailers. Without Shopify, they don’t have the tools to succeed in the digital world. Without those tools, retailers will suffer, meaning subscription revenue projects to keep rising for a lot longer. At the same time, consumers won’t stop shopping in the digital channel, so transaction revenue will continue to march higher, too.
As such, regardless of which way the trade war plays out, Shopify’s growth narrative should remain broadly robust for the foreseeable future. This sort of unstoppable growth narrative is the exact type of narrative investors want exposure to at this point in time.
Cloud identity platform Okta (NASDAQ:OKTA) falls into the same boat as Shopify. This is a secular growth, small-cap services company with tremendous momentum at the moment, and this momentum will not be derailed by trade disputes.
In a nutshell, Okta sells a cloud security solution that enables individuals to securely sign into any enterprise software system. This unique method of tackling digital and cloud security has gained traction and popularity over the past several years. As it has, Okta’s growth trajectory has accelerated higher. Last quarter, the company reported 49% revenue growth.
The trade war won’t disrupt this growth narrative. First, Okta is a services business with minimal exposure to China. Second, digital security is increasingly becoming the most important and central feature of any enterprise, so a U.S. economic slowdown likely won’t impact security spend on platforms like Okta by that much.
In total, Okta is a hyper-growth internet services company with mitigated trade exposure, and it’s a company that provides high-value services with resilient demand. That’s a winning combination in today’s market.
As of this writing, Luke Lango was long FB, PINS, FIVE, AEP, NFLX, GOOG, SHOP and OKTA.