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5 Tech Stocks to Buy on a Likely US-China Interim Trade Deal

Nalak Das

After a rough August, when the year-old trade conflict between the United States and China heightened, it seems that tensions are now cooling on both sides. Several initiatives have been taken by the economic giants to restart the negotiation process. Although neither is thinking of an immediate solution to the trade dispute, these developments should help in defusing growing trade-related concerns.

Possibility of an Interim Trade Deal  

On Sep 12, President Donald Trump told reporters that he is not averse to an interim trade deal with China although his preference will be to have a full agreement resulting in a complete trade deal with the Asian economic powerhouse.

Earlier that day, Bloomberg reported that high-level officials of the Trump administration are considering offering an interim trade deal to China. Bloomberg cited five internal sources that say the U.S. government would like to delay imposing new tariffs on Chinese goods or it may even roll back some tariffs which are already levied on China for the first time since the trade dispute started in March 2018.

In return, the U.S. government wants China to substantially increase imports of domestic agricultural products. Also, more importantly, the Chinese authority must comply with their earlier commitments related to the use and application of intellectual properties, before the trade negotiation broke down in May.

Notably, intellectual property theft by Chinese companies in the guise of producing goods for the American tech giants is the rationale behind the Trump administration’s imposition of these tariffs. Safeguarding of the highly valuable patents of the American tech heavy companies from China is of foremost importance to the United States.

Pressure on Both Countries

Neither the United States nor China has appeared victorious in the trade battle so far. Instead both countries along with the global economy have been suffering over the past one year owing to slowing growth and exports.

In the second quarter of 2019, China’s economic growth fell to lowest level in 27 years. China’s imports have fallen in six out of first seven months this year, indicating its sluggish economic growth. China’s manufacturing PMI for July came in at below 50, reflecting contraction of Chinese manufacturing.

On the other hand, the U.S. economy is currently witnessing a dichotomized character. While consumer-centric data and labor market data revealed a solid foothold in the U.S. economy, the business segment is bearing the brunt of tariff war.

Higher input costs, shrinkage in exports, and lack of proper government policies, resulted in a plunge in business investments. Moreover, the new tariffs will be levied mostly on consumer goods, which is likely to dent consumer spending, the brightest spot in the economy, to a large extent. Additionally, the U.S. general election is due in November 2020, compelling Trump to reach some sort of a deal.

Consequently, from the beginning of September, both sides have shown eagerness to defuse trade-related tensions.

On Sep 11, China’s Ministry of Finance said in a statement on its website that it will exempt some U.S. products in the areas of cancer drugs, lubricants, pesticides and shrimp meal from tariff for one more year. These products were scheduled to be under the new tariff effective next week.

On the other hand, President Donald Trump has tweeted that he will delay imposing 30% tariff replacing the existing 25% on $250 billion of Chinese goods from Oct 1 to Oct 15 as a “gesture of good will” after Chinese vice premier Liu He requested the same as “the People’s Republic of China will be celebrating their 70th Anniversary.”

Technology Stocks to Benefit the Most

China plays the role of a low-cost supplier of intermediary products and other inputs to high-tech U.S. industries. At the same time, China is also the largest market for U.S. high-tech products. Repeal of tariffs on Chinese intermediary goods will raise the profit margin of U.S. tech giants and a will boost demand for their products.

At this stage, we have narrowed down our search to five tech stocks which has exposure in China and have popped in the past three months despite facing trade-induced market volatility. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks in the past three months.

KLA-Tencor Corp. KLAC designs, manufactures, and markets process control and yield-management solutions for the semiconductor and related nano-electronics industries worldwide. The Zacks Rank #1 company provides advanced process control and process-enabling solutions for manufacturing wafers and reticles, integrated circuits, packaging, printed circuit boards and flat panel displays.

The company has an expected earnings growth rate of 11.4% for the current year. The Zacks Consensus Estimate for the current year has improved 3.6% over the last 60 days. The stock has jumped 36.3% in the past three months.

Cirrus Logic, Inc. CRUS is a leader in high performance, low-power ICs for audio and voice signal processing applications. The Zacks Rank #1 company’s products span the entire audio signal chain, from capture to playback, providing innovative products for the world's top smartphones, tablets, digital headsets, wearables and emerging smart home applications.

The company has an expected earnings growth rate of 5.7% for the current year. The Zacks Consensus Estimate for the current year has improved 24.6% over the last 60 days. The stock has jumped 40.9% in the past three months.

Alphabet Inc. GOOGL is a global tech leader. The Zacks Rank #2 company provides web-based search, advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce and hardware products.

The company has an expected earnings growth rate of 13.5% for the current year. The Zacks Consensus Estimate for the current year has improved 8% over the last 60 days. The stock has climbed 13.6% in the past three months.

Lattice Semiconductor Corp. LSCC develops and sells semiconductor technologies in Asia, Europe and the Americas. The Zacks Rank #2 company offers field programmable gate arrays that consist of five product family lines, including the ECP, MachXO, iCE40, CrossLink, and programmable mixed signal devices.

The company has an expected earnings growth rate of 72.7% for the current year. The Zacks Consensus Estimate for the current year has improved 16.3% over the last 60 days. The stock has soared 51.9% in the past six months.

MACOM Technology Solutions Holdings Inc. MTSI designs and manufactures analog radio frequency (RF), microwave, millimeterwave, and lightwave spectrum products in the United States, China, the Asia Pacific, and internationally. The Zacks #2 company’s primary markets are networks including CATV, cellular backhaul, cellular infrastructure and fiber optic applications.

The company has an expected earnings growth rate of 139.2% for the current year. The Zacks Consensus Estimate for the current year has improved 23% over the last 60 days. The stock has soared 63.4% in the past six months.

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