Stocks with the heaviest dependence on China for sales could offer the biggest upside for investors if the U.S. and China are able to sign a trade deal. Those set to benefit the most include well known brands like Nike Inc. (NKE), Caterpillar Inc. (CAT), A.O. Smith Corp. (AOS), Tesla Inc. (TSLA) and DuPont de Nemours Inc. (DD), according to a detailed story in Barron's.
A.O. Smith generates roughly 33% of its sales from China, while Nike gets 14% of its revenues from the region and Tesla attributes 8% of its sales to China. The heavy reliance on the Asian region for these five companies not only makes them potential winners, but also threatens to send these stocks south if the trade talks go sour this weekend or a deal fails to materialize in the future.
Optimism about a deal has risen after Secretary of the Treasury Steve Mnuchin said that the U.S. sees a "path" to an ultimate agreement. The Dow Jones Industrial Average (DJIA) index jumped upon the announcement on Wednesday, closing just slightly lower on Thursday. Meanwhile, President Trump and China’s President Xi plan to discuss, but not yet close, a deal at the G-20 meeting in Osaka, Japan on Saturday.
Shares of the world’s largest athletic apparel company have gained 12.8% year-to-date (YTD) through Thursday close, compared to the S&P 500’s 16.7% return over the same period. The consumer stock has also underperformed the broader market in the most recent three-month period, down 0.5% versus a 3.9% increase for the S&P 500.
Elon Musk’s pioneering electric car company has missed the market rally in 2019, with fears over a reignited trade war with China only adding to the company’s woes. Disappointment over lower-than-expected shipments have led many analysts to go bearish on Tesla, doubting that the firm can reach profitability and citing concerns over lower than expected demand. Tesla has also experienced significant hurdles ramping up production of the Model 3 sedan, the firm’s highly anticipated and first mass market vehicle, seen as key to the firm’s success against traditional automakers.
The Silicon Valley car company has struggled in China, where it imports all of its cars from its California plant. Tesla stock is down a whopping 33% YTD, yet its shares have recovered 18.4% over the recent 30 day period. Still the stock trades at a multiple of about 37 times estimated 2020 earnings, per Barron’s, compared to the Russell 3000 Auto & Auto Parts Index, at 10 times.
Industrial giant Caterpillar, which gets over 20% of its business from Asia, is trading at a 30% discount to the Dow. The stock is up 6.6% YTD, lagging the DJIA’s 13.7% gain this year, in part due to its heavy reliance on China.
Caterpillar management has expressed its support of a free trade deal, emphasizing its potential to spur global growth.
“Caterpillar for many, many years has been an advocate of free trade, and so we think that it isn’t a zero-sum game,” said CEO Jim Umpleby at an investor day last month, per Barron’s. “I think the thing that’s most important is if, in fact, there was a free-trade agreement. And in fact that helps increase global economic growth. That’s a very good thing for us.”
The threat of a trade war with China exists for many more companies apart from these five high-risk picks, including many hot tech plays like Intel Corp. (INTC) and Broadcom Ltd. (AVGO). On the positive side, a trade deal would likely sharply boost sentiment and boost the overall market, including shares of these China-dependent firms.
According to another Barron’s report, “the bar is set low” for the forthcoming meeting between the two presidents, with none expecting a comprehensive trade deal, but some more optimistic about a potential roll back of tariffs.