A full-blown trade war could test the resiliency of the nine-year bull market, with key groups exposed to a major correction, but a handful of sectors could thrive in the challenging conditions and find their way to new highs. Building a watch list of these issues before the next shots are fired could pay dividends in coming months, especially if forced to sell winners caught in the maelstrom. (See also: 3 Sectors to Sell Short in a Trade War.)
Small caps stand at the top of this elite list, explaining why the Russell 2000 Index broke out to an all-time high in May. However, choosing the right plays here is harder than it looks. While many domestically focused businesses will be less affected by foreign affairs, those dependent on rising material costs may find it harder to grow revenues. As a result, it makes sense to focus attention on service-oriented groups like healthcare, software and entertainment. (See also: 3 Small-Cap Stocks That Can Thrive Amid a Trade War.)
Glu Mobile Inc. (GLUU) makes mobile games for smartphones and tablets. It came public at $11.50 in March 2007 and posted an all-time high at $14.80 in June. The subsequent decline picked up steam during the economic collapse, dropping to an all-time low at 22 cents, while a bounce into 2011 stalled at $6.10. The stock has spent seven years testing that resistance level, with the sixth rally into the barrier now in progress. Excellent volume support in recent months raises the odds for a breakout that brings the double digits into play.
Biotechnology stocks could shine if tariffs are thrown up around the world because many of these companies have no commercial products, with their value driven by speculation rather than income. Traders have taken notice of this unique advantage in recent weeks, lifting the SPDR S&P Biotech ETF (XBI) above $100 for the first time in its 12-year history. Keep in mind that "going local" is the key theme here, avoiding larger drug companies that depend on foreign sales. (For more, see: Biotech Stocks Could Lead Summer Rally.)
Fate Therapeutics, Inc. (FATE) develops cellular immunotherapies for cancer and immune disorders. The stock topped out at $13.55 in March 2014 and entered a downtrend that continued into February 2016's all-time low at $1.46. A slow-motion recovery wave caught fire in December 2017, reaching the four-year high in March. The rounded consolidation since that time has nearly completed a multi-year cup and handle breakout pattern that may support a measured move target into the mid to upper $20s.
U.S. automakers could plummet during a trade war, cut off from foreign revenues while North American supply disruptions trigger a nightmare scenario with material costs. It's assumed that consumers will buy General Motors Company (GM) or Ford Motor Company (F) vehicles if tariffs are thrown up on foreign autos, but rising sticker prices could trigger an exodus into the used car market, with the few publicly traded sector plays offering excellent upside potential.
CarMax, Inc. (KMX) operates 189 used car facilities in 41 states. The stock ended a multi-year uptrend in the mid-$70s in April 2015 and sold off for 10 months, finding support at a three-year low in the low $40s. The subsequent bounce completed a round trip into the prior high in October 2017, giving way to a reversal that reached support at the 200-week exponential moving average (EMA). An April bounce has continued into late June, lifting the stock within four points of the 2017 high. It will complete a multi-year cup and handle pattern when it finally reaches that resistance level, with a breakout targeting $100 to $110. (See also: CarMax Accelerates Into Fast Lane Ahead of Earnings.)
The Bottom Line
Buying into small caps, biotechnology and the pre-owned auto market could offer opportune profits if trade tensions fail to yield fruitful negotiations in the coming weeks. (For additional reading, check out: 7 Stocks That Will Win in a Global Trade War.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>