The trade war with China isn't over. Although there has previously been some talk of a potential settlement, President Trump has recently threatened to raise tariffs on Chinese goods to 25% by Friday. Currently many items imported from China are taxed at 10%. While tariffs are good for many domestic producers and could create numerous jobs, they may not be good for some companies in the short term who cannot move production on short notice. In this article, we will analyze 5 companies that might suffer if the trade war with China continues and how the smart money is positioned among them. We follow around 700-740 top funds in total.
Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Alibaba Group Holding Limited (NYSE:BABA)
As China's biggest e-commerce company, Alibaba might not grow as fast if President Trump enacts the higher tariffs. China's economy is already slowing, and the higher potential tariffs could slow growth further. Given its large size, many investors view Alibaba's performance as somewhat dependent on how well the Chinese economy does. Of the around 700-740 elite funds we track, 113 funds owned $11.47 billion of Alibaba Group Holding Limited (NYSE:BABA) on December 31, versus 127 funds and $15.12 billion respectively on September 30.
Walmart Inc. (NYSE:WMT)
Tariffs are typically bad for retailers as they mean higher prices for consumers. Given that it has around half a trillion dollars worth of revenue every year, Wal-Mart will probably be affected. Walmart wrote to the U.S. trade representative on September 2018,
As the largest retailer in the United States and a major buyer of U.S. manufactured goods, we are very concerned about the impacts these tariffs would have on our business, our customers, our suppliers and the U.S. economy as a whole. This round of tariffs could impact a significant number of common consumer items that are not easily replaceable. A non-exhaustive summary of consumer products on the proposed list include a range of food products (fish, vegetables, nuts, fruit, grains, flours, other products like soy sauce); beverages; personal care products (makeup to shampoos); detergents; motor vehicles, motorcycles and bicycles; travel goods, handbags and other bags; leather apparel;
Higher prices would obviously not be good for Walmart's business.63 top funds were long Walmart Inc. (NYSE:WMT) as of the most recent 13-F reporting period.
Target Corporation (NYSE:TGT)
Like Walmart, Target is also affected by higher tariff prices. The retailer has said that it is 'deeply troubled' with the trade war before, and the higher tariffs could lead to higher costs at least in the short term. 40 elite funds owned shares of Target Corporation (NYSE:TGT) at the end of December, down 2 funds from the previous quarter.
JD.Com Inc (NASDAQ:JD)
Like Alibaba, JD.com is a big Chinese e-commerce company and thus in part depends on the state of the Chinese economy to drive growth. If JD.com can't deliver on Wall Street's expected growth numbers because the Chinese economy is slower due to the potentially higher tariffs, JD.com sentiment might weaken. 34 top funds owned shares of JD.Com Inc (NASDAQ:JD) at the end of December, up 2 funds from the previous quarter.
Apple Inc. (NASDAQ:AAPL) imports iPhones assembled in China to the United States, and the company could potentially lose some market share in China if the government retaliates. China is a big market for Apple and the company can't shift iPhone assembly out of the country overnight. Warren Buffett is a big shareholder of Apple, as is 115 other elite funds that we tracked at the end of December.