U.S.-China trade relations continue to sour, with the technology sector facing the selling pressure the most. Several U.S. technology companies now have begun to comply with the Trump administration’s ban on China’s Huawei Technologies Inc. The White House has added Huawei to its Entity List that includes companies that American firms can’t sell technology to without obtaining a license from the U.S. government. By the way, this isn’t the Trump administration’s negotiating tactic but a long-term policy.
Following this, chip bigwigs like Intel, Qualcomm Corp and Broadcom Inc, to name a few, have restricted supply of major software and hardware components to Huawei. To make matters worse, Google will now stop offering some of its services for devices made by Huawei.
Lest we forget, Huawei, the world’s second-largest smartphone maker, relies heavily on Google’s Android software to operate its smartphones. And we cannot forget that the company purchased computer chips of nearly $11 billion from America’s tech behemoths. What’s more, even foreign companies are restricted from selling products that include U.S.-made parts to Huawei. CNN business simplified this by saying that “Huawei won’t be able to buy, for example, chipsets from a Taiwanese supplier if those chipsets contain any U.S. parts or components.”
Trade negotiations between two of the world’s most powerful economies have fallen apart, after CNBC reported that the scheduling of the next round of talks is “in flux.” After all, neither side is willing to compromise. Protection of intellectual property rights continues to be a bone of contention for the economies.
While tech faces the brunt, investors are worried that the trade war might easily destabilize an already-slowing global economy and raise tensions between the superpowers regarding South China Sea and industrial espionage. The International Monetary Fund, in the meantime, warned a tariff war would pose a “threat to the global economy.”
But, the perils aren’t the same for all stocks. Let us, thus, look at the potential winners from a trade war —
Service Players Are Best Bets
Goldman Sachs has expressed its opinion that service-oriented companies are less exposed to trade policy compared to goods-producing companies like Apple, Exxon Mobil, and Johnson & Johnson. This is because services firms, especially the likes of Amazon.com, Inc. AMZN, Microsoft Corporation MSFT and Facebook, Inc. FB, incur lower foreign input costs that might be subject to tariffs. Such input costs are mostly related to direct materials, labor and factory overheads.
Improvement in ad business as well as blistering growth trajectory in the cloud and, grocery and apparel segments currently bode well for Amazon. The Zacks Consensus Estimate for its current-year earnings has increased 0.6% over the past 60 days. The company’s expected earnings growth rate for the current year is 32%, way ahead of the Internet - Commerce industry’s projected rally of 8%. The Zacks Rank #3 (Hold) company has outpaced the broader industry so far this year (+23.8% vs +22.8%).
Microsoft, by the way, is registering solid revenue growth banking on its cloud division that comprises products like Office 365 commercial, Azure and Dynamics 365. In fact, majority of analysts believe that the cloud division will maintain rapid growth in the long run and have a positive impact on the company’s earnings narrative, especially, after CFO Amy Hood noted that she expects “continued strong performance in commercial cloud business.” Moreover, the company is expected to create a host of e-commerce tools for its Azure cloud customers, thereby making it more appealing.
The Zacks Consensus Estimate for its current-year earnings has increased 3.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 18.1%, way ahead of the Computer - Software industry’s projected rally of 6.9%. The Zacks Rank #2 (Buy) company has outperformed the broader industry over the past three-month period (+13.7% vs +10.4%).
And when it comes to Facebook, Mark Mahaney, lead technology analyst at RBC Capital Markets, said that the company, unlike other tech stocks, has a low exposure to China at roughly 1% to 2%. Additionally, Facebook is less pricey when its price-earnings ratio is considered.
Facebook currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-quarter earnings has climbed 9.1% over the past 60 days. The company’s expected earnings growth rate for the current quarter is a solid 10.3%, higher than the S&P 500 index’s estimated rally of 6.7%. The stock, in the meantime, has already outperformed the Internet - Services industry in the past three months (+12.8% vs +5.9%).
How Can We Forget Safe Havens?
It’s just not pockets of the technology sector that are relatively immune to trade war, utilities and real estate sectors are also isolated from trade-related issues. After all, stocks from these sectors 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, such stocks are deemed defensive as electricity, gas and water, and housing are essentials.
Prominent among utility players is owner and operator of regulated water utility and wastewater systems, Middlesex Water Company MSEX. The company currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for its current-year earnings has increased 5.9% over the past 60 days. The stock’s expected earnings growth rates for the current year is 10.7%, more than the Utility - Water Supply industry’s expected rally of 3.7%. The company has surpassed the broader industry in the past one-year period (+46.2% vs +31.7%).
Among real estate players, M/I Homes, Inc. MHO is a prominent name. The builder of single-family homes should certainly make the most of the current rise in home builder sentiment. U.S. homebuilders are seeing a rebound in sales on lower mortgage rates. The National Association of Home Builders/Wells Fargo Housing Market Index rose to 66 in May, the highest since October. Any reading above 50, by the way, shows that more builders view present conditions as good rather than poor.
Nonetheless, M/I Homes has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 2.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 5.7% compared with the Building Products - Home Builders industry’s estimated decline of 10.4%. The stock has outperformed the broader industry on a year-to-date basis (35.0% vs 30.9%).
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