Trade tensions between the U.S. and China played a large role in the correction that rocked the market in December. There is rising optimism of a possible trade deal on the horizon, and there are several stocks that will likely rally should a deal be reached between the world’s two largest economies.
President Trump recently postponed a March 1 deadline to impose higher tariffs on around $200 billion worth of Chinese goods. The possibility of the higher tariffs has resulted in a ongoing negotiations between the two nations, and Trump cited “substantial progress” has been made, leading to his decision to postpone the deadline on a deal.
Reaching a deal with China will not be easy, and there are a lot for the two nations to discuss, including China’s insistence that U.S. companies share intellectual property and technology to operate in the nation. The U.S. also wants to see China increase its purchases of agricultural and energy products.
The market has enjoyed a nice rally to kick off the new year, and the major indexes should continue to move higher should the U.S. and China finally hash out their differences and reach a trade deal. While the entire market should move higher on a reached deal, some stocks will move more strongly than others. Here are five stocks that could stage significant rallies on an eventual trade deal between the two nations.
Chip maker NVIDIA (NVDA) has a lot on the line with the current negotiations. The company generates around 20 percent of its total sales from China, and its exposure in the nation played a material role in the stock’s big selloff during the final months of 2018. Not only is the market concerned about the level of NVIDIA’s revenue exposure in China, but also the potential impact to global chip demand from a prolonged trade war between the two nations. While the overall market has recovered nicely in 2019, NVDA has yet to really stage a meaningful comeback. NVDA enjoyed strong earnings growth in recent years, with profits up 60 percent per annum over the last five years. Earnings growth is slowing, with analysts forecast per annum earnings growth of just 8.4 percent for the next five years, but that forecast could be greatly understated should the U.S. and China reach a favorable deal. Analysts see a lot of upside in the stock, which trades at $153.93, with an average price target of $191.13.
Skyworks Solutions (SWKS) is another chip maker that has huge exposure in China. Skyworks gets 83 percent of its total sales from China, so the stakes are certainly high for the company as the U.S. and China attempt to reach a trade deal. After a year’s long decline, SWKS stock hit a bottom and started to trend higher in early January but failed to break through an important level of resistance at $85. SWKS has a lot of upside potential with the stock trading at just 11 times future earnings and earnings are forecast to rise 11 percent per annum over the next five years. With over 80 percent sales exposure in China, Skyworks is incredibly vulnerable to ongoing trade tensions, and likewise a lot to gain once a deal is reached between the two nations and fear over worsening economic conditions in China start to fade. SWKS is trading at $80.75 and analysts have an average price target of $93.73 on the stock.
Marvell Technology (MRVL)
Marvell Technology (MRVL) is a chip maker that gets roughly 50 percent of its revenue from China. The company’s high revenue exposure in China puts the company at risk if President Trump winds up increasing tariffs on the nation that have the potential to further slow the nation’s economy. Like most chipmakers, MRVL shares sold off sharply during the second half of 2018 before hitting a low in December and has trended higher in the first two weeks of 2019 on expectations of a possible trade deal between the U.S. and China on the horizon. Even with the stock’s recent gains, analysts see a lot more upside potential. MRVL trades at $19.71, well below the $23.74 average price target analysts have on the stock. MRVL trades with a forward P/E of 15.7, with earnings expected to rise 11 percent per annum over the next five years.
Tech titan Apple (AAPL) generates 20 percent of its total sales in China. Apple recently lowered its revenue expectations for the first time in 16 years, mostly due to poor iPhone sales in China. China’s economy has been weakening, and the ongoing trade war and higher tariffs would further weaken the nation’s economy which in turn would further impact Apple’s ability to sell iPhones in the country. Apple has 40 stores in China, and reported around $52 billion in sales in China during its most recent fiscal year, so the stakes are certainly high and Wall Street will be slow to drive shares much higher until a deal is reached. AAPL stock has rallied after a big selloff in the final months of 2018 as trade negotiations have progressed, but AAPL remains well below its October high. AAPL remains a very attractive value, with AAPL shares trading at just 13.5 time future earnings. The stock trades at $174.02 with an average price target of $191.56.
Dollar Tree (DLTR)
Discount retailer Dollar Tree (DLTR) may see a nice rally on the heels of a trade deal because of the level of goods its purchases from China. Dollar Tree gets around 41 percent of its products from China, so tariffs on Chinese imports definitely poses a risk to the company’s profitability. Dollar Tree is the most exposed company in the value sector to China, with Dollar General (DG) for example only importing 5 percent of its products from China. While DG stock currently trades just pennies below its all-time high, DLTR is well below its all-time high set in 2018. Analysts expect Dollar Tree to grow earnings 9.2 percent per annum over the next five years, but that figure would be in jeopardy if trade talks falter and higher tariffs are imposed on Chinese imports. DLTR trades at $95.01 with an average price target of $98.50.