Many investors are looking for stocks that can rise in the face of President Trump's expanding trade war that is likely to slow the economy, crimp corporate profits and depress stock prices. Goldman Sachs advises that they consider companies that generate nearly all their sales in the U.S., with little or no dependence on exports. In part two of our report on Goldman's findings, we look at representative stocks that they recommend in other industry sectors, including: health benefits manager Anthem Inc. (ANTM), auto parts retailer AutoZone Inc. (AZO), cable provider Charter Communications Inc. (CHTR), business uniform provider Cintas Corp. (CTAS), discount retailer Dollar General Corp. (DG), and department store Target Corp. (TGT). (For more, see also: 7 Stocks That Can Win The Trade Wars: Goldman.)
|Stock||Non-U.S. Sales||Gain Since May 31|
|S&P 500 Index (SPX)||5.2%|
Sources: Goldman Sachs U.S. Weekly Kickstart report dated July 20; gains are computed through the close on July 25 using adjusted close data from Yahoo Finance.
The median stock in Goldman's Domestic Sales basket has 0% non-U.S. sales, while the figure for the median S&P 500 stock is 27%. In fact, information technology is the only sector in the basket with any stocks that have international sales, and the median for that group is 15%, versus 53% for the entire technology sector in the S&P 500.
We discuss Charter Communications and Dollar General in more detail below. We offer them as illustrative cases of how other fundamentals behind the stocks in Goldman's basket should be considered by investors.
Not Entirely Immune
Investors should note that generating 100% of sales in the U.S. market does not make a company entirely immune from the negative impacts of tariffs and trade restrictions. Many of these companies are likely to see an increase in their cost of goods sold (COGS), and thus a decrease in their profit margins, to the extent that they purchase imported products, whether for resale or for their own use. Additionally, a general economic slowdown created by a trade war is likely to result in reduced revenues. In particular, companies whose own customers suffer significant negative impacts from a trade war should see a direct hit to sales.
Meanwhile, should trade tensions ease, stocks with the greatest international sales exposure may be better-positioned to outperform. These stocks generally have come under selling pressure recently, and would be poised for rebounds if trade fears turn out to be overblown.
There's been much buzz about how cord-cutting, the process by which consumers drop traditional cable TV service and switch to viewing videos via the internet, is supposed to hurt cable companies like Charter. However, cable TV providers also tend to be the dominant providers of broadband internet access in their service areas. As a result, while Charter is losing cable subscribers, it is gaining far more internet users, and thus is increasing revenue at a solid pace, The Motley Fool reports. Lou Simpson, formerly a key colleague of Warren Buffett, has Charter among the top picks in his own concentrated portfolio. (For more, see also: 6 Stock Picks of One of Buffett's Favorite Investors.)
Through acquisitions that include Time Warner Cable, Charter is now the second-largest cable provider in the U.S., and this is giving it added leverage in negotiating with content owners over the cost of programming, according to Mary Kelly, an assistant professor of economics at the Villanova School of Business, as cited by U.S. News & World Report. Nonetheless, the article continues, Charter is facing increased costs of programming as well as heightened competition from other big rivals.
While Charter Communications stock is up by 5.2% from May 31 through the close on July 25, it has suffered an 11.6% plunge since its intraday high on July 9. Goldman Sachs believes that investors have turned unduly negative on telecom stocks, largely based on concerns about expensive acquisitions. (For more, see also: Verizon, Charter Unfairly Punished: Goldman Sachs.)
"Improving economics among low-income consumers" should give a boost to the shares of discount retailer Dollar General, in the opinion of L&F Capital Management, as presented in Seeking Alpha. Their price target implies an upside of more than 20% from today, and they note that same store sales figures have been on an uptrend. Additionally, discount and low-price retailers are prominent among those that have been least affected by the growth of online selling. (For more, see also: 4 Retail Stocks Shattering Records Despite Amazon.)