As the threat of a global trade war increases, US investors may consider adopting precautionary steps. According to a July 2017 note to clients from Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc. (GS), as quoted by CNBC, “below the surface of the market, trade conflict would benefit the performance of most domestic-facing U.S. stocks relative to the most foreign-facing firms.”
Indeed, given President Trump’s historical support for protectionism, one of Goldman’s main investing themes since the 2016 election has been U.S. corporations with a majority, if not all, of their revenues generated in the United States. According to CNBC, Oppenheimer recommends seven equities in Goldman’s domestic sales basket.
Protected From Protectionism
According to Goldman and CNBC, all seven of these firms generate 100% of their revenue in the United States, with the exception of Intuit, which generates 95%. Here are the price movements for these companies from the close on February 28 to the close on March 2, for year-to-date 2018, for full year 2017, as well as their future P/E ratios and dividend yields, based on adjusted closing data from Yahoo Finance:
- CSX Corp. (CSX): +2.5% in the last month; +0.5% year to date; +55.5% in 2017; P/E 15; 1.6% yield
- CVS Health Corp. (CVS): -0.4% in the last month; -6.4% year to date; -5.8% in 2017; P/E 10; 2.9% yield
- Dollar General Corporation (DG): -0.3% recently; +1.6% year to date; +26.9% in 2017; P/E 17; 1.1% yield
- Intuit Inc. (INTU): +1.2% in the last month; +7.3% year to date; +39.2% in 2017; P/E 27; 0.9% yield
- Public Storage (PSA): +0.3% recent; -6.7% YTD; -2.9% 2017; P/E 25; 4.1% yield
- Verizon Communications Inc. (VZ): +1.1% recent; -7.8% YTD; +4.0% 2017; P/E 10; 4.9% yield
- Wells Fargo & Co.(WFC): -1.7% recent; -4.8% YTD; +13.2% 2017; P/E 11; 2.7% yield
On March 1, President Trump declared his intention to impose significant tariffs on imported steel and aluminum. From the close on February 28 to the close on March 2, the S&P 500 Index (SPX) fell 0.8%. The index is up 0.7% year to far, while it was up 19.4% in 2017. According to the Investopedia Anxiety Index (IAI), our millions of users worldwide are tremendously anxious about the financial markets. (For more information, see Trump May Kill Jobs With Tariffs, NAFTA Exit.)
Following Trump’s tariff move, investors have been hearing about shifting their investments towards small-cap firms, which usually have a bigger share of domestic sales than large caps. While this is true in general, the change is not as large as some may assume. According to FactSet Research Systems Inc. statistics quoted by MarketWatch, companies in the small size Russell 2000 Index (RUT) generate 20.6% of their revenue outside the United States, compared to 30.3% for the big cap S&P 500. The Russell was up 1.4% from the close on February 28 to the close of March 2, but was down 0.2% year to date.
As a consequence, several small-cap equities in the United States may have significant exposure to international sales. Lithia Motors Inc. (LAD), The Brink’s Co. (BCO), Spectrum Pharmaceuticals Inc. (SPPI), and AxcelisTechnologies Inc. were all included in a recent Investopedia post (ACLS).A closer look reveals that they do, in fact, reflect a range of worldwide sales exposures. (For further information, read Top 4 Small-Cap Stocks for 2018.)
A Closer Look
Lithia operates a car dealership network in the United States, making it an entirely domestic corporation. According to its February 6 results call, Axcelis, a semiconductor manufacturing equipment firm, generates more than 83% of its revenues from exports. According to its annual report, Brink’s operates in over 100 countries and produces 75% of its income outside the United States.
However, since Brink’s is a service provider that works via local affiliates rather than a hard commodities exporter, it should be immune to trade conflicts. In reality, since trade disputes reduce the value of the US dollar, corporations like Brink’s will experience an increase in their abroad income when translated to US dollars. The basic result is that, although small caps as a group may provide some protection from a trade war, the degree of protection varies substantially amongst companies.
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