Despite the S&P 500 trading at lofty heights, 8 blue chip stocks are still selling well below their record highs but may be poised for big gains as investors pursue diverse strategies to profit amid a volatile U.S.-China trade war.
Some professional investors are wading in to buy beaten down blue chips from the semiconductor industry, including Broadcom Inc. (AVGO), Xilinx Inc. (XLNX), NXP Semiconductors N.V. (NXPI) and Skyworks Solutions Inc. (SWKS). These buyers see huge upside if a strong U.S.-China trade agreement is signed, according to the Wall Street Journal.
By contrast, Goldman Sachs argues that service-sector stocks, many of which also are trading sharply off their highs, are best positioned to prosper if trade talks sour, including Berkshire Hathaway Inc. (BRK.A), Bank of America Corp. (BAC), UnitedHealth Group Inc. (UNH) and AT&T Inc. (T). Goldman says these service stocks are much more likely to outperform than stocks in goods-producing sectors.
What it Means for Investors
Trade tensions between the world’s two largest economies has posed a major challenge for equity investors who are trying to position their portfolios to profit amid a number of unpredictable and opposing outcomes. Those outcomes range from imminent trade peace stemming from a strong U.S.-China deal to economic and market chaos if the trade war escalates and deepens.
At least the Federal Reserve's rate outlook became a bit clearer on Wednesday as Fed officials indicated they may cut rates if the economy weakens further. Stocks rose.
The Favorable Trade Deal Strategy
Picking stocks based on their potential to bounce back on favorable trade-talk news is the strategy employed by Ben Phillips, chief investment of officer of New York-based ETF sponsor and investment manager Event Shares. His firm recently bought shares of Broadcom, Xilinx, Skyworks and NXP. While all four stocks were “previously at what we viewed as expensive valuations,” Phillips said, they have all taking a hit from escalating trade tensions. In fact, chip stocks as a group are trading nearly 12% off their record highs, making even more of them potentially attractive.
Despite trailing the broader market, these stocks have characteristics that make them potential bargains. Broadcom, for instance, carries a dividend yield of 3.8%, almost double the 2% average yield of the S&P 500. That yield, along with free cash flow, is also expected to increase at double-digit rates, per Barron's.
The Souring Trade Talks Strategy
But in the case where trade talks deteriorate and the U.S. and China ramp up tariffs even further, it may take a significant amount of time for stocks to rebound. To insulate against a prolonged trade war, Goldman Sachs argues that investors should give higher weight to service-sector stocks since they are less exposed to trade policy. They also currently have much stronger fundamentals than goods-producing stocks.
“Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-US sales exposure than Goods companies,” said Goldman’s analysts, per MarketWatch. “Services stocks have faster sales and earnings growth, more stable gross margins, and stronger balance sheets.”
To be sure, some investors say the best trade war strategy is to hunker down and ride it out as minute adjustments to portfolios based on daily headlines leads to mounting transactions costs. “I think all the brouhaha around so-called trade wars presents investors with an opportunity to remind themselves just how counterproductive tinkering with their portfolios in response to the headline risk du jour can be,” said Ben Johnson. Morningstar’s director of fund research, told the Journal.