By Shoshanna Delventhal Updated Feb 28, 2019
Stock investors searching for how to profit off of a possible trade deal with China should look at three stocks that remain sharply low over the past year despite their recent rebounds. Stocks that are exceptionally well positioned to lead a rally in the U.S. equity market following a positive trade accord include vehicle stocks Brunswick Corp. (BC), Harley-Davidson (HOG), and Polaris Industries (PII). For these stocks, investors are at the moment “only modestly factoring in a favorable China trade resolution," which means that they have huge upside, according Wells Fargo’s Timothy Condor, per Barron’s.
3 China Plays
(YTD stock performance; % decline from 52-week high)
- Brunswick Corp.; 13%, -24.5%
- Harley-Davidson Inc.; 8.7%; -20.8%
- Polaris Industries Inc.; 13.9%; -22.3%
Trump Announces 'Substantial Progress' in Trade TalksOn Monday, trade-sensitive U.S. stocks rose on news that Washington will hold off on implementing the next scheduled increase in tariffs. Trump attributed the standstill to “substantial progress” in trade talks. A full-blown deal would remove additional tariffs imposed last year and call for no levy increases in the future, given China makes several promises, including buying more U.S. products, establishing a stable currency exchange rate, granting full access to Chinese markets and executing intellectual property protection. According to analysts at Bank of America Merrill Lynch, such a deal would boost S&P 500 stocks by 5% to 10%, and lift EPS by 1%, per Barron’s.
Vehicle Stocks Have Big EPS UpsideAn easing in trade fears among investors this year has led shares of Brunswick, Harley and Polaris to outperform the market, all up over 8% YTD, yet still down as much as 25% from their 2018 highs.
Wells Fargo expects “the trade war with China will be resolved to some degree,” spelling more goods times for these three vehicle industry players. Condor rates all three at outperform, and highlights Polaris as particularly positioned to benefit given it has the greatest exposure to China. He sees as much as $20 per-share benefit to Polaris from a trade accord, and an incremental $1.60 per share in profit “if just the China portion of trade were resolved.” The analyst’s bullish forecast also factors in strong sales for side-by-sides and snowmobiles.
Harley could see a $3.70 per-share increase in light of a trade deal, according to Condor, while Brunswick could see an incremental $2.65 per-share value added to its stock.
Many market watchers have recommended more often cited stocks such as chip makers Intel corp. (INTC), Micron Technology Inc. (MU) and Nvidia Corp. (NVDA), and Broadcom Ltd. (AVGO), as well as smartphone maker Apple Inc. (AAPL), per an earlier Investopedia story. All of the aforementioned stocks derive more than 20% of their total top line from China. Other industries expected to benefit from a trade truce include beaten down energy and agricultural plays like Monsanto Co. (MON), Deere & Co. (DO) and Cheniere Energy Corp. (CHK).
Looking AheadIt’s important to note that with huge upside potential for stocks such as Harley Davidson, there comes major downside risk if a China-U.S. deal falls through. In light of the fundamental issues facing Harley in the long-term, as displayed in its dismal quarterly earnings results posted in January, issues are likely to intensify without a trade deal. In the December quarter, the bike maker earned half a million dollars, or roughly zero cents a share, compared to the $0.28 EPS predicted by analysts polled by FactSet.
Ultimately, a partial deal with compromises seems more likely than a full-blown agreement. In this case, some market watchers expect little movement or a “sell the news” knee-jerk reaction, given that even this has been increasingly priced into the market with recent rhetoric from the White House, per Barron’s. On the other hand, in the event of a breakdown in a deal, in which a 25% tariff is ultimately imposed on all Chinese goods, 2019 earnings could come in 4.5% lower, per an HSBC estimate.