As the specter of a global trade war looms, U.S. investors might consider taking defensive measures. "Below the surface of the market, trade conflict would benefit the performance of most domestic-facing U.S. stocks relative to the most foreign-facing firms," according to a July 2017 note to clients from Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc. (GS), as quoted by CNBC.
Indeed, given President Trump's longstanding advocacy of protectionism, one of Goldman's ongoing investment themes since the 2016 election has been U.S. companies with sales that are largely, if not entirely, derived domestically. Below are seven stocks in Goldman's domestic sales basket that Oppenheimer recommends, per CNBC.
Protected From Protectionism
Of these seven companies, all derive 100% of their sales in the U.S., with the exception of Intuit, which is at 95%, per Goldman and CNBC. For these stocks, here are their price moves from the close on February 28 through the close on March 2, for year-to-date 2018, for full year 2017, plus their forward P/E ratios and dividend yields, per adjusted close data from Yahoo Finance:
- CSX Corp. (CSX): +2.5% recent; +0.5% YTD; +55.5% 2017; P/E 15; 1.6% yield
- CVS Health Corp. (CVS): -0.4% recent; -6.4% YTD; -5.8% 2017; P/E 10; 2.9% yield
- Dollar General Corp. (DG): -0.3% recent; +1.6% YTD; +26.9% 2017; P/E 17; 1.1% yield
- Intuit Inc. (INTU): +1.2% recent; +7.3% YTD; +39.2% 2017; P/E 27; 0.9% yield
- Public Storage (PSA): +0.3% recent; -6.7% YTD; -2.9% 2017; P/E 25; 4.1% yield
- Verizon Communications Inc. (VZ): +1.1% recent; -7.8% YTD; +4.0% 2017; P/E 10; 4.9% yield
- Wells Fargo & Co. (WFC): -1.7% recent; -4.8% YTD; +13.2% 2017; P/E 11; 2.7% yield
President Trump announced his plan to slap high tariffs on imported steel and aluminum on March 1. The S&P 500 Index (SPX) was down by 0.8% from the close on February 28 through the close on March 2. The index is up by 0.7% for the year-to-date, and advanced by 19.4% in 2017. The Investopedia Anxiety Index (IAI) indicates that our millions of readers worldwide are very concerned about the securities markets. (For more, see also: Trump May Kill Jobs With Tariffs, NAFTA Exit.)
In the wake of Trump's tariff announcement, investors also have been hearing about rotating into small-cap stocks, which typically have a higher proportion of domestic sales than large caps. While this is generally true, the difference is not as dramatic as some might expect. According to data from FactSet Research Systems Inc. cited by MarketWatch, stocks in the small cap Russell 2000 Index (RUT) derive 20.6% of their revenue from outside the U.S., versus 30.3% for the large cap S&P 500. The Russell was up by 1.4% from the close on February 28 through the close on March 2, but down by 0.2% for year-to-date 2018.
As a result, some U.S. small-cap stocks actually can have very large exposures to sales abroad. A recent Investopedia article covered four top small caps, Lithia Motors Inc. (LAD), The Brink's Co. (BCO), Spectrum Pharmaceuticals Inc. (SPPI) and Axcelis Technologies Inc. (ACLS). Closer examination that they indeed represent a spectrum of international sales exposures. (For more, see also: Top 4 Small-Cap Stocks for 2018.)
A Closer Look
Lithia runs a chain of auto dealerships in the U.S., making it a purely domestic company. Semiconductor manufacturing equipment company Axcelis, on the other hand, derives over 83% of its sales from exports, per its February 6 earnings call. Armored car company Brink's operates in over 100 countries and generates 75% of its revenues from outside the U.S., per its annual report.
However, since Brink's is a service provider that operates through local affiliates, rather than an exporter of hard goods, it theoretically should be insulated from trade wars. In fact, insofar as trade wars will drive down the value of the U.S. dollar, companies such as Brink's will see an increase in their overseas revenues as converted into U.S. dollars. The bottom line: while small caps as a group may offer some shelter from a trade war, the degree of protection can vary greatly from company to company.