At the end of a month marred by heightened trade tension between Washington and Beijing that caused the stock market have its worst May since 2010, U.S. President Donald Trump fired off a tweet that threatened Mexico with a 5% tariff on all imports commencing Monday, June 10, to curb illegal immigration.
The market promptly sold off on the Mexican tariff threats but quickly recovered in early June as the Federal Reserve indicated it was prepared to do what's necessary – aka reduce interest rates – to offset the risks of ongoing trade conflicts to ensure continuing economic expansion. The positive sentiment continued Monday after Mexico agreed on Friday to increase efforts to reduce the flow of illegal migrants.
"I am pleased to inform you that The United States of America has reached a signed agreement with Mexico," Trump tweeted Friday, per Bloomberg.
Now that the United States and its southern neighbor have reached an immigration deal, companies with significant exposure to Mexico stand to benefit from ongoing trade without the impost of tariffs. Let's take a closer look at three stocks that generate a sizeable portion of their revenue from Mexico and at possible ways to trade them.
Skyworks Solutions, Inc. (SWKS)
Skyworks Solutions, Inc. (SWKS) manufactures and markets proprietary semiconductor products, such as amplifiers, attenuators, directional couplers, and voltage regulators. Its customers are primarily large smartphone manufacturers and makers of wireless routers, medical devices, and automobiles. The Woburn, Massachusetts-based company has roughly 40% of its assets in Mexico, including a 360,000-square-foot manufacturing facility in Mexicali. Needham analyst Rajvindra Gill expects Skyworks to resume sales growth in 2020, supported by 5G infrastructure and internet of things (IoT) demand. As of June 11, 2019, Skyworks stock has a market capitalization of $12.62 billion, issues a 2.28% dividend yield, and is up 10.21% year to date (YTD).
Skyworks shares fell sharply throughout May after the U.S. government restricted American companies from supplying Chinese telecommunications giant Huawei with products. Analysts estimate that Skyworks generates roughly 10% of its revenue from the Chinese technology conglomerate. The stock found support from previous price action at the $67.50 level and received an additional 4.21% boost Monday as the market factored in the migration deal with Mexico. Those who take the trade should anticipate a move back to the April swing high at $93.88. Place a stop-loss order below the recent swing low at $66.29 to protect trading capital.
Constellation Brands, Inc. (STZ)
With a market cap of $36.48 billion, Constellation Brands, Inc. (STZ) produces and imports beer, wine, and spirits in the United States and globally. The company's well-known Mexican beer brands Corona and Modelo account for the lion's share of its beer production. AllianceBernstein analysts estimate that a 5% base tariff could result in a 7% cut to Constellation's imported beer profits. Therefore, it's not surprising to see investors relieved and return to the stock Monday after a late-May siesta. Despite Constellation Brands stock trading down 5.55% over the past month, it's up a healthy 20.29% YTD as of June 11, 2019. Investors also receive a 1.42% dividend yield.
The Constellation Brands share price slipped 5.8% after President Trump announced the Mexican tariffs but has since recouped all of those losses to trade back above the 200-day simple moving average (SMA). In another bullish signal, the 50-day SMA crossed above the 200-day SMA last month, which typically indicates the emergence of a new uptrend. Traders who open a long position at the current price should set a take-profit order near the 2019 high at $213.70. Manage risk by placing a stop under the June 6 low at $181.74.
Lennox International Inc. (LII)
Lennox International Inc. (LII), which has a market value of $11.20 billion, provides climate control solutions in North America as well as internationally. It manufactures and sells a range of products for the heating, ventilation, air conditioning, and refrigeration markets. Independent investment bank Cowen estimates that 33% of the company's total revenues (and 50% of residential sales) come from Mexico – hence, Lennox stands to benefit significantly from the scrapped tariffs. The heating and cooling systems maker topped analysts' top- and bottom-line first quarter estimates and reiterated its 2019 full-year earnings guidance range between $9.75 and $10.35 per share. Lennox offers a 1.17% dividend yield and has gained an impressive 30.74% this year, outperforming the diversified industrials industry average by 12.40% over the same period as of June 11, 2019.
Like most stocks in the S&P 500, Lennox International added the majority of its YTD gain in the first three months of the year. However, the share price showed relative strength to the broader market in May, falling only 2.7% while the major indexes dropped between 6% and 8%. Lennox shares jumped 2.58% Monday on the Mexican deal, breaking out above a tight two-month trading range. Despite the upside momentum, the relative strength index (RSI) remains below overbought territory, which gives the price room to move higher before consolidating. Consider using a shorter moving average, such as the 15-day SMA, as a trailing stop to let profits run. Place an initial stop order under the 50-day SMA to guard against a head-fake trade.