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4 Stocks Gaining on Improved China Relations

Markets are still digesting the news from the personal between US President Trump and Chinese President Xi Jinping at last weekend’s G20 economic summit. The key takeaways, of course, are that both leaders went into the meeting upbeat, got along well, and came out agreeing to hold further tariffs in abeyance while their negotiating teams resumed talks. It was personal diplomacy, done well, and investors breathed a heavy sigh of relief.

That relief was reflected across a broad spectrum of the stock markets. The S&P 500, which closed at 2,995 on July 3, is up 2.8% from its most recent low point of 2,913 registered on June 26. We have already written in this space about gains in the semiconductor chip industry; now we’ll turn to the retail sector.

Apple, Inc. (AAPL)

Our first stock stands at the junction of tech and retail. Apple is a giant in both fields, and so sensitive to pressures – market and political – from both directions. In the case of US-China trade tensions, Apple stood to lose from disruptions in its supply chain and its product markets. China is an important audience for the iPhone line, where Apple holds a 9.1% market share, and Chinese factories make up the lion’s share of iPhone’s final assembly.

So, while Apple’s stock has been recovering well from reverses this past May and in the second half of 2018, the potential of a trade war between the two countries has tempered AAPL’s gains. The stock jumped, however, after Trump and Xi’s successful meet. At this writing, AAPL is up 3.3% since last Friday.

This fresh burst of momentum comes at just the right time for Apple. The venerable tech leader saw its stock bounce back in June from losses in May, but that recovery had slowed by the end of the month. This week’s gains have put it back on track towards May’s high price of $210.

Wedbush’s Daniel Ives drew the obvious conclusion from the news, saying, “Apple Inc. is “clearly” the biggest beneficiary of the weekend Group of 20 meeting that included direct talks between the U.S. and China.” He went on to add, “With the positive step in the right direction announced between the two countries to not levy additional tariffs while negotiations continue, in essence this takes away the biggest risk on the Apple story for now.” Ives sees room for growth in Apple’s stock. He sets a $235 price target, suggesting confidence in 15% upside.

Although less certain of Apple’s future, Citigroup’s Jim Suva is suggesting that price volatility may be in store. He points out that Apple’s share in China’s smartphone market is feeling pressure from local competition, but add that he “remains optimistic on the Services segment with Apple Arcade to launch in the second half of 2019.” He maintains his ‘buy’ rating with a price target of $205, just a half-percent higher than the current share price.

Apple’s analyst consensus rating is a ‘Moderate Buy,’ based on 19 buys, 15 holds, and 2 sells given it in the last three months. The disparate opinions reflect the stock’s recent volatility, while the consensus reflects AAPL’s underlying reliability. The current share price is $204, with an average price target of $213, and an upside potential of 4.4%.

AutoZone, Inc. (AZO)

We’ve grown accustomed to sky-high share valuations, with Alphabet (GOOGL) trading at $1,122 and Amazon (AMZN) at an eye-popping $1,939, but one entry to the list of high-priced stocks may surprise you. AutoZone, the leading automotive spare parts and repair retailer, holds a stock valuation of $1,130.

That valuation was lower last week. AZO slipped in the second half of June, when tensions rose between the US and China, and President Trump threatened additional tariffs. Since the positive meeting between Trump and Xi, however, AZO has gained 2.8% in share price.

The sudden moves in AZO are due to the company’s significant exposure to US-China trade, and to the tariffs that the Administration was proposing. Company CEO Bill Rhodes, in the May 21 earnings conference call, put it bluntly: “We have a significant amount of products that come out of China. We don’t direct import a ton – less than 10% – but we have a lot of importers that bring it in from China, and then you also have a lot of our products where the components are being manufactured in China and the products are being assembled here.” Rhodes also was quite direct in admitting that AutoZone would simply pass on tariff-induced higher prices to its customers.

The CEO’s reason for simply passing on higher prices – the inelastic demand nature of his business – lay behind Oppenheimer analyst Brian Nagel’s recent decision to upgrade AZO stock from ‘neutral’ to ‘buy.’ Nagel noted that AZO operates over 6,000 retail locations, has potential for “sustained strong commercial sales expansion.” He gives the stock a price target of $1,225, with an upside potential of 8.4%.

AutoZone’s position in a business niche rich with potential customers – there are over 270 million registered automobiles in the US, and drivers have consistently shown over the years that they are willing to pay handsomely to keep them running – helps it maintain a ‘Strong Buy’ from the analyst consensus. The company has a unanimous 8 ‘buy’ ratings. As mentioned, shares are priced at $1,130. The average price target of $1,185 suggests an upside of 4.9% for AZO.

Dollar General Corporation (DG)

Discount retail, with its reliance on low-cost sourcing, is home to numerous companies that felt pressure from the potential trade war. Dollar General, which operates at the low end of the discount price spectrum, was described by Credit Suisse’s Judah Frommer as “the perfect candidate to get hit hard” by renewed tariffs. Frommer noted that DG imports between 40% and 42% of its merchandise directly from China.

Direct exposure made DG vulnerable, but also set it up for appreciation when the trade tensions eased. Since June 28, Dollar General shares have seen a 2.9% gain and positive results in each of the last three trading sessions.

Reduced pressure on import prices is not the only good news for Dollar General. At the end of May, the company reported positive quarterly results to start off FY2019, with top- and bottom-line growth, expectations beats for EPS and sales, and a dividend hike. Investors were happy, as were Wall Street analysts.

Writing from BMO Capital, Kelly Bania gave DG a solid ‘buy’ rating with a price target of $140. Referring to the company’s improvements in grocery perishables, she said, “While no specific details were provided, we expect that DG has even more initiatives to come, including: more opportunities to leverage data, and potential ways to monetize DG’s growing, rural store footprint.”

Oppenheimer’s Rupesh Parikh also took an upbeat view of DG, raising his price target to $150. Parikh says that he maintains DG as one of his Top Picks, and that “the bull case continues to strengthen.” His price target suggests an upside potential of 7.9%, significantly higher than the average.

Dollar General’s consensus rating is a ‘Strong Buy.’ Like AutoZone, the analysts are unanimous on this stock – the consensus is based on 14 buys assigned in three months. The average price target, $142, suggests an upside of 2.5% from the current share price of $139. The modest upside reflects the tight margins typical in the deep discount retail sector.

Walmart, Inc. (WMT)

Like Dollar General, Walmart inhabits the discount retail sphere. The company, famous for its price rollbacks, is also the world’s largest retailer and private employer, so while Walmart faced trade war pressure on its low-cost merchandise sourcing, its sheer size gave it leverage in keeping that pressure as low as possible.

However, even a $320 billion giant like Walmart could not avoid the economic or geopolitical realities. CFO Brett Biggs, in relation to trade tensions, said in May, “We're going to continue to do everything we can to keep prices low. That's who we are. However, increased tariffs will lead to increased prices, we believe, for our customers.”

Walmart’s large grocery section – food items and other groceries make up more than half of the company’s sales, and are primarily sourced from the US and South America – reduced its exposure to China trade, but did not eliminate it. UBS analyst Michael Lasser estimates that 26% of Walmart’s products are imported from Chinese suppliers. With a more moderate exposure to potential tariffs, Walmart also saw more moderate gains when the threat of tariffs faded. WMT shares are up 1.8% since last Friday.

Wall Street’s analysts are impressed with the company’s continued resilience in the face of various challenges, be they potential tariffs or increased competition from digital retailers. KeyBanc’s Edward Yruma noted WMT’s underappreciated acquisition of the PhonePe payments app as typical of the management’s forward vision. He said, “PhonePe recently added financial services, which we think should be the primary revenue driver. We see a $14B+ valuation opportunity over the medium term. PhonePe underscores WMT's openness to growth opportunities beyond physical retail, and we raise our WMT price target to $125 on continued confidence in WMT's ability to innovate.” Yruma gives Walmart a $125 price target, suggestive of an 11% upside potential.

Five-star financial blogger Laura Hoy describes Walmart as a stock that “every 30-year old should buy and hold forever.” She acknowledges the challenge from e-commerce, and adds, “WMT stock has made an impressive recovery and although the firm is still facing some headwinds, it’s a solid stock to buy. Judging by the company’s improving e-commerce sales, it looks like Walmart is on the right track to compete against the likes of Amazon.”

Walmart holds a ‘Moderate Buy’ from the analyst consensus, based on 8 buys, 2 holds, and 1 sell. The slightly mixed nature of those ratings reflects the headwinds the Hoy pointed out, primarily the challenge of e-commerce. WMT shares sell for $112, and the average price target is $114, yielding an upside of just 1.8%. Like Dollar General, the low upside goes along with the discount retail industry’s thin profit margins.

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