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Winners & Losers From the U.S.-China Trade Problem

Tirthankar Chakraborty

U.S.-China trade war is showing no signs of cooling down. The trade tussle got intensified after President Trump urged American firms to start looking for an “alternative to China.” Trouble began after China announced that it is going to impose new tariffs of 5% and 10% on nearly $75 billion of U.S. products.

Beijing clarified that the move was due to the Trump administration’s intention to impose 10% tariffs on $300 billion of Chinese imports. Trump, in the meantime, reacted to China’s decision by saying that the United States will increase tariffs on $250 billion of Chinese goods to 30% from an earlier 25%. And tariffs on additional $300 billion imports from China would go up to 15% from 10%.

Some may argue that Trump has now said that China wants to return to the negotiating table. He, in fact, claimed receiving two “very good calls” from Beijing. However, the Chinese have downplayed the significance of such calls.

Global Times editor Hu Xijin added that “based on what I know, Chinese and U.S. top negotiators didn't hold phone talks in recent days. The two sides have been keeping contact at technical level, it doesn't have significance that President Trump suggested. China didn't change its position. China won't cave to US pressure.”

With U.S-China at loggerheads over trade issues, the stock market continues to gyrate. But not all stocks are facing the brunt. Let us, thus, look at the potential winners and losers from the trade war —

Potential Winners as Trade Issue Lingers

As uncertainty over the outcome of the Sino-American trade deal rises, investors should target tariff-proof stocks that stand to gain from an all-out trade war.

Service firms are safe bets because such firms are unperturbed by trade tensions as they have less foreign sales exposure compared to goods companies. Service stocks also have less foreign input costs that might be subject to tariffs. Such input costs mostly include direct materials, labor and factory overheads.

And the best service firm, no doubt, is Microsoft Corporation MSFT. The company currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has advanced 2.3% over the past 60 days. The company’s expected earnings growth for the current year is 9.9%, compared with the Computer - Software industry’s projected decline of 0.4%. The stock has surpassed the broader industry so far this year (+33.4% vs +25.8%). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

As markets seem to be plagued by widespread uncertainty, defensive stocks like utilities are gaining as they seem to be the safest investment option. And why not? Utility stocks are generally non-cyclical or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand, irrespective of market volatility. Moreover, utilities are deemed defensive stocks as electricity, gas and water are essentials.

Prominent among utility players are Alliant Energy Corporation LNT and Unitil Corporation UTL. Alliant Energy operates as a utility holding company that provides regulated electricity and natural gas services in the Midwest region of the United States. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 0.4% in the past 60 days. The stock’s expected earnings growth rate for the current year is 3.7% versus the Utility - Electric Power industry’s estimated rally of 3.3%.

Unitil engages in the distribution of electricity and natural gas in the United States. It has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 0.9% in the past 60 days. The stock’s expected earnings growth rate for the current year is 4% versus the Utility - Electric Power industry’s projected rally of 3.3%.

In fact, shares of Alliant Energy and Unitil have gained 23.7% and 17.8%, respectively, so far this year. Take a look —

 

Not So Lucky Ones!

As trade issues continue to persist between two of the world’s largest economies, the biggest loser will certainly be Boeing Company BA. After all, the aerospace giant sells about a fourth of its commercial aircraft to Chinese customers. Also, China had threatened to impose tariffs on several American products, including airplanes, if there is no trade truce.

One of the biggest areas affected by trade tensions is the U.S. automotive industry. Last year, China had increased tariffs from 15% to 40% on any U.S.-manufactured automobile entering the country. And now, with China contemplating more tariffs, things are surely not looking up for U.S. automakers. General Motors Company GM, in particular, projected $1 billion extra costs this year owing to tariffs. Harley-Davidson also cautioned that its tariff-related costs are expected to increase from $23.7 million in 2018 to more than $100 million this year.

What about heavy equipment makers? Caterpillar Inc. CAT has claimed that tariffs would cost the company $250 million to $350 million in 2019, while Deere & Company DE expects U.S. tariffs on Chinese imports to total around $100 million this year.

Last but not the least, Archer-Daniels-Midland Company ADM, the processor and seller of agricultural commodities, products, and ingredients, said that trade tensions will disrupt its supply chain and eventually dent earnings.

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Unitil Corporation (UTL) : Free Stock Analysis Report
 
Alliant Energy Corporation (LNT) : Free Stock Analysis Report
 
The Boeing Company (BA) : Free Stock Analysis Report
 
General Motors Company (GM) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Caterpillar Inc. (CAT) : Free Stock Analysis Report
 
Deere & Company (DE) : Free Stock Analysis Report
 
Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
 
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