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Goldman Sachs: 5 Stock Picks to Survive the Trade War

Harriet Lefton, Contributing Writer, Kiplinger.com

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U.S.-China trade war tensions are rising again, and investors are scrambling to find the right defensive stock picks to weather this latest flare-up in what has been a year-plus standoff.

President Donald Trump recently hiked tariffs on $200 billion worth of Chinese goods from 10% to 25%, arguing that Beijing broke a previously agreed deal. The president also formally instructed U.S. Trade Representative Robert Lighthizer to begin the process of raising tariffs "on essentially all remaining imports from China, which are valued at approximately $300 billion." Beijing will retaliate, saying it will increase its own tariffs on about $60 billion in American imports.

Unsurprisingly, the threat of a full-blown trade war is playing havoc with the global markets. The major indices have pulled back considerably from their recent peaks. But Goldman Sachs has just released a very useful report setting out how to pick the best stocks for these turbulent times.

"Services firms are less exposed to trade policy and have better corporate fundamentals than goods companies and should outperform even if the trade tensions are ultimately resolved, as our economists expect," writes David Kostin, Goldman Sachs' head U.S. equity strategist.

Here are five standout stock picks for the U.S.-China trade war from Goldman Sachs' report. We have used TipRanks market data to dig into five "Outperform"-rated services stocks that the firm has singled out. Each of these will likely still have their down days with broader-market sentiment. But over a prolonged standoff, they should hold up better than the rest.

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Market value: $930.5 billion

TipRanks consensus price target: $2,226.88 (18% upside potential)

TipRanks consensus rating: Strong Buy

Amazon.com (AMZN, $1,889.98) is a perfect example of a services stock with fewer foreign input costs at risk of tariffs. Moreover, its bargain-focused e-commerce operations should look even more attractive as the escalated trade war ramps up costs on all sorts of products.

Goldman Sachs analyst Heath Terry ramped up his price target from $2,100 to $2,400 (27% upside potential) on April 26. Following generally positive earnings results, the analyst explained, "We continue to believe AMZN represents the best risk/reward in Internet given the relatively early-stage shift of workloads to the cloud, the transition of traditional retail online, and share gains in its advertising business, the long-term benefits of each we believe the market continues to underestimate for Amazon."

The company reported in-line revenue, while operating income came in materially above expectations. That was alongside modestly slowing revenue growth that still comes to 20% year-over-year - something most other mega-caps would envy. However, the headline news was that free shipping for Prime subscribers will go from two days to just one day.

"The move to 1-day Prime delivery - on top of wage increases in November - will help further separate Amazon from competitors, driving more Prime subscriptions, expanding the (total addressable market) and widening the company's competitive advantages," Deutsche Bank's Lloyd Walmsley wrote following the Prime announcement.

Amazon is among the most popular stock picks among the pros: It has earned 34 back-to-back "Buy" ratings and an average price target that suggests further upside potential of 18%. See what other top analysts have to say about AMZN on TipRanks.

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Market value: $223.5 billion

TipRanks consensus price target: $36.00 (18% upside potential)

TipRanks consensus rating: Strong Buy

AT&T (T, $30.62) is the largest wireline and paid TV services provider in the U.S. and the second-largest wireless provider, behind rival Verizon (VZ). T has a solid balance sheet and a long-growing dividend courtesy of the business's inherent ability to generate gobs of cash.

This high-yield dividend stock boasts a particularly generous yield of 6.6% vs. an average of just 1% for the technology sector. And that dividend has increased annually without interruption for the past 35 years, putting it in the elite company of the Dividend Aristocrats: 57 companies in the Standard & Poor's 500-stock index that have increased their dividend payouts for 25 consecutive years or more.

Five-star Oppenheimer analyst Timothy Horan has just reiterated his T buy rating with a $41 price target (34% upside potential). "The dividend seems safe, with strong wireless fundamentals," the analyst wrote following the company's recent earnings report. AT&T "has the ability to integrate its services in unique ways, and we see substantial room to use virtualized technologies to greatly reduce operating and capital expenditures."

Horan notes that AT&T will launch its long-awaited over-the-top streaming product in the final quarter of this year, where it will compete in a crowded field that includes Netflix (NFLX), Apple (AAPL), Amazon and many others. "We look forward to hearing plans on T's secret sauce of mobility bundling" Horan writes.

Overall, Horan believes that combined with Time Warner, free cash flow per share could grow 6% per year. What are other financial experts saying about this telecom giant? Find out on TipRanks.

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Market value: $537.6 billion

TipRanks consensus price target: $218.88 (16% upside potential)

TipRanks consensus rating: Strong Buy

Facebook (FB, $188.34) joins Goldman Sachs' trade war stock picks because of its strong services focus. And in fact, FB has significant support from the Street in general, garnering a "Strong Buy" consensus: Of 37 analysts covering the stock, 34 rate it a "Buy."

Among the bulls is RBC Capital's Mark Mahaney, who singles out FB as his top large-cap internet stock and gives it a price target of $250. That suggests shares can surge another 33% from current levels.

"FB's portfolio of Social Media & Messaging assets remains world leading. Match that with a management team that is willing to 'think private' and 'act private' - and has generally executed very well - and fundamentals here should remain impressive for a long time to come," he writes.

He came away from Facebook's F8 developer's conference impressed with the "very, very robust" product development the company is implementing and planning. Facebook rolled out a substantial redesign of its website and app to more heavily emphasize private group and visual stories. Meanwhile, a new Messenger version called Lightspeed was also unveiled, which claims to be 2x faster and 7x smaller than other leading messaging apps.

Mahaney says Facebook is "willing to take short-term negative actions - even company-jeopardizing actions - that will benefit the company (and its shareholders) long-term." And in the meantime, he says, that provides a very compelling investing opportunity for savvy investors - especially when sentiment turns negative. See why other top analysts are also bullish on Facebook.

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Market value: $152.7 billion

TipRanks consensus price target: $214.53 (7% upside potential)

TipRanks consensus rating: Strong Buy

Good news for McDonald's (MCD, $199.99) investors. The company just reported its first U.S. same-store sales beat since 2017, alongside sustained international outperformance. Performance like this should help counter what could be lower in-store traffic in its Chinese locations.

"MCD's peak valuation is justified by numerous tangible U.S. sales drivers that should protect against downside and optimistically lead to positive sales revisions," writes top-rated Cowen & Co. analyst Andrew Charles.

Notably, the analyst cites McDonald's recent $300 million acquisition of Dynamic Yield acquisition. AI-powered Dynamic Yield is a personalization platform that can be integrated into digital menu boards and recommend specific items to customers based on factors such as time or weather. The technology will roll out across American drive-thru locations in 2019.

"In the near term, we expect Dynamic Yield to serve as a benefit to mix as McDonald's increases suggestive selling capabilities in the drive-thru," Charles writes. And looking forward, he sees further potential for the new technology: "Longer term, we expect Dynamic Yield to present sales benefits from personalizing what is today an anonymous restaurant experience, through loyalty initiatives and/or increased digital penetration."

Citing valuations for quick service restaurant peers like Dunkin Brands (DNKN) and Yum! Brands (YUM), Charles boosts his price target from $205 to $225. This new price target indicates 13% upside potential from current levels. For further insights into MCD stock, check out its analyst page on TipRanks here.

SEE ALSO: 18 Consumer Staples Stocks to Take the Edge Off Your Portfolio

Walt Disney

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Market value: $241.0 billion

TipRanks consensus price target: $152.33 (14% upside potential)

TipRanks consensus rating: Strong Buy

Walt Disney (DIS, $134.04) is one of Wall Street's top stock picks thanks to many drivers that should stay strong regardless of a U.S.-China trade war. Ahead of the launch of its highly anticipated Disney+ streaming service in November, DIS reported strong earnings results for the fiscal second quarter.

Rosenblatt Securities analyst Mark Zgutowicz lauded the company in a report titled "Like What We're Seeing While Waiting for November." "Parks/Consumer Products and Film were the standouts from the release highlighting the strength of the Disney brands," he wrote. Boosted by higher ticket prices, the Parks/Consumer Products segment topped consensus estimates by roughly $200 million.

Disney also is on the brink of opening its highly anticipated $1 billion theme park expansion Star Wars: Galaxy's Edge. The park is already fully booked for the first month, with reservations all snapped up in just two hours.

As for the upcoming over-the-top service launch, Zgutowicz writes, "We prefer media companies who can pivot away from (mobile network subscriber) headwinds and benefit from the growing streaming and direct-to-consumer (DTC) market." He believes a strong service will have exclusive, high-quality content that consumers want to engage with, operated by a company that can invest in content. "Disney fits the description for all three of these requirements," he writes.

"Disney is our top pick in the content space as we reiterate our Buy rating and raise our price target to $175" - indicating roughly 30% upside potential ahead. Discover how this price target breaks down on TipRanks here.

Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.

SEE ALSO: 10 Stocks That Could Feast or Fall on China Trade


Copyright 2019 The Kiplinger Washington Editors