When it comes to the stock market, U.S. President Donald Trump’s Twitter (NYSE:TWTR) account may be the crystal ball which can help investors predict what’s going to happen next.
Back in early May, Trump fired off a tweet in which he said that China “broke” the trade deal, and that new tariffs would be coming soon. That tweet shook markets. Stocks fell. Over the next month, trade tensions between the U.S. and China heated up. Stocks kept falling. From Trump’s tweet to the end of May, the S&P 500 shed more than 6%.
Now, in late June, Trump has fired off another trade-related tweet. But this one has a far more positive tone. In this tweet, Trump said that he and China President Xi Jinping are going to have an “extended meeting” next week at the G-20 Summit in Japan. That tweet surprised markets, since most investors presumed the two nations were on such disagreeable terms that a meeting at G-20 wasn’t going to happen. Now, it’s going to happen. That’s good news for markets. The S&P 500 responded by rallying more than 1% that same day.
In other words, a Trump tweet was the very thing which started a big meltdown in markets in May, because that tweet basically said trade talks are not going well. Now, a different Trump tweet could be the very thing which starts a melt-up in markets in late June, because this tweet basically says that a trade deal could be coming soon.
With that in mind, let’s take a look at six stocks that are ready to bounce in a big way in the event a trade deal does get struck between the U.S. and China sometime soon.
Stocks to Buy for a Trade War Bounce: Alibaba (BABA)
If the U.S. and China strike a trade deal in the foreseeable future, one stock that will fly higher is Alibaba (NYSE:BABA).
Being the juggernaut in the Chinese e-commerce landscape, Alibaba goes as the China economy goes. When China’s economy is firing on all cylinders, so is Alibaba. Revenue growth is big, margins are healthy and BABA stock moves higher. On the flip side, when China’s economy is slowing, Alibaba slows, too. Revenue growth decelerates, margins compress and BABA stock moves lower.
China’s economy was firing on all cylinders in 2017. That’s why Alibaba stock went from $90 to $180. But, China’s economy slowed in 2018. That’s why BABA stock fell from $180 to $130. Shares rebounded to $190 in 2019 as China’s economy picked up steam against the backdrop of improving trade relations. But trade relations deteriorated in May, and since then, BABA stock has dropped back to $160.
It looks like trade relations are back on the “getting better” path. So long as they remain on that path, BABA stock will move higher. In the event that a trade deal is actually struck, this stock will soar to levels above $200.
One under-the-radar growth stock which is set to win big if the U.S. and China strike a trade deal is iRobot (NASDAQ:IRBT).
iRobot manufactures and sells consumer household robotic products, with the present focus on robotic vacuums. This is a growth market. Low-level automation is the first step of the automation revolution, and iRobot is king in the low-level-automation world, creating machines which automate simple tasks that most people don’t like to do (vacuuming, mowing the lawn, cleaning the pool, so on an so forth). As such, as the automation wave gains mainstream traction over the next several years, household robotic adoption will rise rapidly and iRobot’s sales and profits will march higher. That growth will ultimately push IRBT stock higher, too.
This secular growth narrative has hit a snag with the trade war. iRobot is a U.S. company. One of its biggest growth markets is China. As such, iRobot is at the epicenter of the U.S.-China trade war, and every tariff hike back and forth results in higher input prices for the company. In short, trade war tensions between the U.S. and China have put the secular iRobot growth narrative on hold.
If a deal is struck between these two countries, that holding period will end, and it will be replaced by resumption of the iRobot secular growth narrative. That resumption will put IRBT stock back on a winning path.
Luckin Coffee (LK)
One growth-oriented way to play a trade war resolution is through buying shares of Luckin Coffee (NASDAQ:LK).
Luckin Coffee is China’s brand new, hyper-growth coffee shop chain, which is surging throughout China using a unique, small-store, digital-first model that resonates with China’s millennial urban consumers. At scale, this company could one day turn into the Starbucks (NASDAQ:SBUX) of China. Starbucks has a $100 billion market cap. Luckin’s market cap is at $5 billion. As such, the runway for long term growth in LK stock is quite promising.
But, this is a China growth story, and if the China economy isn’t doing well, the LK stock growth narrative won’t be smooth. China’s economy won’t do well if trade tensions continue to escalate. But if a trade deal is struck, China’s economy will get back to firing on all cylinders. If that happens, the Luckin stock growth narrative will fire on all cylinders, too.
As such, a trade war resolution could be the exact catalyst LK stock needs to get started on a long-term winning path.
Source: rodrigofranca via Flickr
One global apparel giant that stands to benefit tremendously from a trade deal is Nike (NYSE:NKE).
Nike is the world’s leading athletic apparel brand. As the world’s leading athletic apparel brand, the company has a ton of exposure to China, trade and tariffs. Roughly 26% of Nike brand footwear and apparel is manufactured in China, and the Greater China geography accounted for 15% of Nike brand sales last year. As such, Nike has broad exposure to both U.S.-China tariffs and a trade-related China economic slowdown.
Remove these issues, though, and Nike looks really good right now. The company is simultaneously benefiting from a secular rise in global athletic apparel adoption and growing share in that market using rapid product innovation and a shift to a direct-sales model.
Broadly, then, if trade war risks disappear, NKE stock should fly higher. The rest of this growth narrative is on fire right now. Remove the one headwind, and that creates runway for big gains in Nike stock.
Foot Locker (FL)
Along the same lines as Nike, another athletic apparel stock that should run higher if a trade deal is struck is Foot Locker (NYSE:FL).
Things look good at Foot Locker right now. After spending a few quarters below zero, comparable-sales growth is back in positive territory again, and comps were up nearly 5% last quarter. Physical stores are comping positive. Digital sales are growing at a double-digit pace. Gross margins are expanding. Profits are up.
Net net, the numbers at Foot Locker are pretty good, supported by a secular rise in athletic apparel adoption and stabilization in the physical and wholesale retail markets. The only problem here is the trade war. Unfortunately, it’s a big problem. Owing to the athletic footwear market’s broad exposure to imports from China, Foot Locker presently finds itself at the epicenter of the trade war. The higher tariffs go, the worse things will get for Foot Locker.
But, if those tariffs go away entirely, things will get way better for Foot Locker. FL stock is cheap enough right now (8 times forward earnings) that if things do get better, the stock will bounce in a big way.
One sector that has been killed by the U.S.-China trade war is the semiconductor market, and one stock in that market that could win big in the event of a trade war resolution is Intel (NASDAQ:INTC).
The semiconductor space has a lot of U.S.-Asia trade exposure, with big customers and manufacturers on both sides of the Pacific Ocean. Thus, as trade tensions between the U.S. and China escalated, global semiconductor demand weakened and production costs became an issue. Consequently, semiconductor stocks dropped.
Intel was one of those stocks. As one of the world’s largest semiconductor companies, Intel has huge exposure to China. But a trade resolution between the U.S. and China should re-stoke demand and ease rising cost pressures. If that happens, Intel’s revenue and margin growth trajectories will meaningfully improve.
Much like FL stock, INTC stock is cheap enough today (10x forward earnings) that any positive news on the trade front should put significant upward pressure on shares.
As of this writing, Luke Lango was long BABA, IRBT, LK, NKE, FL, and INTC.
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