It finally appears that a trade deal is here. If that comes true, then tech stocks should be big beneficiaries. It’s tempting to dismiss all headlines of a trade war deal as more “fake news,” but this one seems real. Both sides have confirmed that there is a clear framework in place for an agreement, and for its part, the U.S. Government has put a fairly detailed account of what the Phase 1 trade deal contains.
That’s not to say that you should take the trade deal to the bank yet. There’s a ton that can happen between when the two sides agree in theory and when it becomes law. For example, look at how long the new U.S.-Mexico-Canada free trade agreement “USMCA” got held up in Congress this year, despite broad bipartisan support.
Still, it appears that the ball is rolling on a real trade accord that will help to start normalizing U.S.-Chinese trade in 2020 and beyond. As such, it’s time to start adjusting our portfolios accordingly. While tech stocks jumped a couple of percent following the trade deal news, I think folks are still underestimating the impact that this will have going forward for certain companies. Daniel Ives, a Wedbust analyst, put it well in a recent research note, saying that the trade announcement:
“[W]as a seminal moment that will stop the Fort Sumter like trade scuffle from spiraling down a negative path for the tech space. With the 15% tariff set to be put into effect Dec. 15 now removed and a large amount being rolled back to 7.5% a major dark cloud is lifted from over the tech space with Apple (NASDAQ:AAPL) front and center.”
In light of this major improvement in the outlook for trade and the global economy, here are seven stocks to take advantage of the improving conditions.
Tech Stocks to Buy: Micron (MU)
While it’s easy to see how this will in fact be a major boon for Apple, I can’t fully get on board the bull case for Apple stock at this point. Apple stock is up 80% from its January low, and it’s hard to justify such rapid gains when you are already the largest company in the United States by market cap. That said, some of Apple’s suppliers should be clear winners.
Take Micron (NASDAQ:MU) for example. Its memory chips are a vital component in all sorts of leading consumer electronic devices, including, of course, Apple’s phones.
Micron stock got pounded in late 2018 on a glut of memory products. Shares started to rebound in early 2019, but plunged again this summer as the trade war lowered demand for Micron’s products. However, the combination of better capacity constraint on the supply side and a sudden pick-up in demand should lift Micron’s fortunes next year. On the latest conference call, Micron said that the bottom is in. Some analysts agree. Rosenblatt’s Hans Mosesmann lifted his price target for Micron from $80 to $100 last week given the company’s improving outlook.
Corning (GLW)
Corning (NYSE:GLW) has historically pulled in about 20% of its revenues from China. And since it sells glass that goes primarily into smartphones and other mobile consumer electronics, it has heavy exposure to the Chinese tech manufacturing ecosystem.
It’s also a large supplier to Apple for the iPhone. In fact, it’s such a key supplier to Apple that Apple just awarded $250 million to Corning this fall to further its development of next-generation glass and related products. This builds on more than a decade that Apple and Corning have been close partners.
Assuming the trade war resolution boosts Apple’s fortunes, it should lift the tide for major components makers like Corning. Corning’s stock is still at $29 now, only $2 per share above its 2019 low, and it offers a nearly 3% dividend yield, making it a value stock to play the trade deal recovery.
Texas Instruments (TXN)
One good way to find tech trade war winners is by looking at companies sorted by the amount of revenues they obtain from China. Texas Instruments (NASDAQ:TXN) is one that scores highly, as nearly half its revenues come from there.
Not surprisingly, Texas Instruments has been in a slump recently. Its Q3 quarterly results were a dud, and the stock sold off. The company blamed customer reluctance to order inventory in light of the rising trade tensions. It guided Q4 down as well on these concerns. And don’t expect things to turn around overnight; the next quarterly results will likely be weak, and Q1 may be a bust as well. Once the trade agreement is in place, however, things should pick back up quickly.
That sets up a nice opportunity in Texas Instruments stock, as it still hasn’t made new all-time highs. It has traded up about 5% since the deal was announced. But it’s still below the $130 level where it peaked in July and then again in the fall. Given how well semiconductor stocks have fared in the meantime, Texas Instruments should already be above its old high at $133 if not for the trade war concerns. Once they announce brighter guidance, there should be a clear path to at least $140 per share. In the meantime, you can collect a generous 2.8% dividend yield from the stock.
Qualcomm (QCOM)
Qualcomm (NASDAQ:QCOM) is another company that relies on China for a massive share of its revenues. So many of the big mobile phone producers are located in China, and the trade war was a massive obstacle to their business. Not only did you have the tariffs, you had the specific dispute between Huawei and the U.S. government over intellectual property and spying allegations. For a phone chip company, this was an absolutely dreadful state of affairs.
As if that weren’t enough, the trade dispute also slowed down the rollout of 5G around the world. That’s because Huawei is a key player in 5G deployment. The trade war has been an obstacle to Qualcomm on many fronts. Despite that, the company made considerable progress in 2019, including winning key patent dispute battles. At 20x forward earnings, Qualcomm is not particularly expensive given the 5G opportunity ahead of it, and the nearly 3% dividend is a nice perk as well.
Skyworks (SWKS)
Skyworks Solutions (NASDAQ:SWKS) simultaneously deals with several of the factors I discussed previously. It has a heavy reliance on Apple as its key customer, so that negative has turned back into a positive as the trade deal comes to fruition. Skyworks also has a large client base in Asia that has lost momentum as the trade war accelerated.
These issues hit Skyworks hard. For the recently concluded fiscal year 2019, Skyworks saw revenues drop 13%, while net income sank 7%. Where things got really nasty was in Q4 in particular. For that quarter, revenues slumped 18% and net income plunged by 26%. It’s not hard to see why. Skyworks’ revenues from China-based original equipment manufacturers dove from $983 million last year to just $719 million this year. That’s a massive impact.
The fun thing is that now most of that can reverse in 2020. What happens to Skyworks stock when it picks that $250 million of lost revenues back up? And it will probably be more than that even, as sales to Taiwan and South Korea-based companies also fell sharply. Put it all together, and revenues could be back up something like 20% with net income rising more than that thanks to operating leverage. Skyworks stock has rallied 20% in recent weeks; however, it could still have significantly farther to run. It’s still only at 18x forward earnings and a massive chunk of its business should be coming back online shortly.
Amphenol (APH)
Amphenol (NYSE:APH) is another semiconductor company set to win as the trade war headwinds subside. Citibank shares that sentiment. Their analyst said Monday that 2020 will be the “year of connectivity” as 5G takes off, and they selected Amphenol as a Top Pick for 2020 to profit off this tide. With the China situation taken care of, that would put 5G deployment schedules and budgets back on track.
Now, to be clear, the trade deal with China won’t resolve all of Amphenol’s issues overnight. As management has been quick to point out, there have been slowdowns in its other lines of business such as the European auto market that haven’t been hit by the China situation directly.
However, the new USMCA trade deal plus this progress with China may lay the groundwork for better terms of European trade as well. In any case, Amphenol stock has been largely stalled out since mid-2018, and could get momentum going in 2020 as the stock has just topped resistance and reached new all-time highs.
JD.com (JD)
Of course, American tech stocks won’t be the only winners from the trade deal. Chinese firms also stand to benefit. Not only do they get improved access to western software, components and markets, they should also get a boost in terms of domestic consumer demand.
That’s a win-win for JD.com (NASDAQ:JD). While JD is known primarily for its e-commerce business, the company has substantial tech-driven efforts as well, such as its leading drone-powered logistics efforts. It was vital that JD maintain access to outside parts and research innovations.
On top of that, the Chinese economy should pick back up, giving JD’s customers more money in their pocket. That, in turn, should help JD’s business acceleration. Last quarter, revenues grew 29%, up from their cycle low around 20%. Any sort of further acceleration should help reinforce the idea that JD is back and that the stock should trade higher than the $35 level it has stalled out at for much of 2019.
At the time of this writing, Ian Bezek owned Texas Instruments, Qualcomm and JD stock. You can reach him on Twitter at @irbezek.
