The U.S. equity strategists at Deutsche Bank A.G. (DB) who cover S&P 500 stocks with exposure to China have long argued that China’s impact to S&P earnings is mostly through its effect on commodity prices and capital goods demand. Most of the following companies either have significant revenue sensitivity to China or their growth pipeline is China- or Asia-centric. Some have little direct revenue from China but will have their pricing power strongly affected. Many of these stocks underperformed during previous China growth scares, and the Deutsche Bank team expects them to continue to lag as they wait for China to accelerate.
We screened the Deutsche Banks China Cyclical basket for the stocks rated Hold or not rated with the highest current price to earnings ratios. If China growth slows to the 7% level from the 7.5% posted today, this could have a big impact on these 10 stocks as they have strong sensitivity to China cyclicality.
Altera Corp. (ALTR) derives almost a third of its total sales from China. Year-over-year earnings have dropped almost 25%. The Thomson/First Call price target for Altera is $35, which is right at current trading levels. Investors are paid a 1.8% dividend.
Cliffs Natural Resources Inc. (CLF) already has been pounded this year and has become a top target for short-sellers. The consensus target for the stock is $22, and it is trading way below that. Investors are paid a 3.8% dividend.
Analog Devices Inc. (ADI) is another chip stock on the Deutsche Bank list. The stock has been hot recently, hitting 52-week highs. It derives almost 22% of its total sales in Asia, with almost 13% from China alone. It is trading close to the consensus price target of $50. Investors are paid a 2.9% dividend.
PerkinElmer Inc. (PKI) generates 10% of its total sales in China. Over the sequential quarterly earnings period, the trend looks worrisome. Revenue dropped 11.8%, and inventory grew 4.9%. The consensus price objective for the stock is $36, and investors are paid a small 0.8% dividend.
Dow Chemical Co. (DOW) is another big name rated to Hold at Deutsche Bank. The chemical giant generates almost 10% of their total sales in China. The consensus price target for the stock is $36. Investors are paid a 3.8% dividend.
Caterpillar Inc. (CAT) may not disclose its actual sales to China, but derives 25.9% of its total sales in Asia. The consensus target for the stock is at $99. Investors receive a 2.8% dividend.
Yum! Brands Inc. (YUM) has been right in the crosshairs of the China exposure issue. With 50% of its total sales in China, any economic or headline slip-up is devastating on its earnings. The consensus price target is $75. Investors are paid a 1.8% dividend.
TE Connectivity Ltd. (TEL) is a stock to hold at Deutsche Bank, as its generates a third of its total revenue in China. The consensus price objective for the stock is $48. Investors are paid a 2.1% dividend.
Thermo Fisher Scientific Inc. (TMO) has seen the short interest in its stock rise dramatically. The consensus price target is at $96.50. Investors are paid a small 0.7% dividend.
Micron Technology Inc. (MU) is yet another chip stock with huge China exposure. Some 35% of their total sales are in China. That combined with very volatile DRAM pricing could make the stock very shaky if China growth slows further. The consensus price target for the stock is $16.
This is by no means a list of stocks to go out and sell short. This is a list of stocks to avoid and perhaps sell-short if the Chinese economy takes a dive. Hedge fund manager Jim Chanos, who runs Kynikos, is vocally skeptical of China and statistics from the country. He is short many Chinese stocks and looks for a market crash there at some point. We better hope he is wrong. If China’s economy collapses, the entire rest of the world will feel it.