International stock markets suffered a serious slide over the last few months of 2018. The fears around slowing global economic growth that provided an injection of investor nerves were arguably most influenced by the rumbling U.S.-China trade war.
President Trump, having come to the conclusion that the trade conditions between the two giant economies were weighted in favour of the quickly growing challenger from the east slapped new import tariffs on a wide range of Chinese imports into the U.S. China reciprocated, stoking concerns the fallout would be a significant drag on the global economy.
While the whole market has been dragged down by the blow to investor sentiment the trade war has caused, some stocks have of course suffered more than most. Talks between the two sides took place this week, extended to an unscheduled third day, with Trump reporting they had “gone very well”. It remains to be seen if the final result will be a breakthrough in negotiations that soothes frayed nerves and reignites, at least to some extent, more positive market sentiment. But if there are positive developments, the most immediate beneficiaries will be the companies that have been sold of heavily. Their share prices in particular.
The companies that are thought to have suffered most as a direct consequence of the U.S.-China trade dispute are, unsurprisingly, U.S. and Chinese stocks. So which are those that analysts expect to show the strongest rebound if and when we are able to put the recent trade war, if not behind us, to one side?
Of the 3 U.S. stocks that will be mentioned, logistics giant FedEx is least obviously down on its luck as a direct consequence of the U.S.-China trade war. However, the deliveries sector is very sensitive to overall economic conditions, where sentiment is down largely due to the influence of the trade war. This also has a less certain recovery timescale as its technicals suggest a long term bearish downtrend that may not be easy to for the FedEx share price to snap out of.
However, the company’s fundamentals look strong and on the basis of its Relative Strength Index (RSI) is shows the evidence of being heavily oversold at the current valuation. Revenues are growing quickly, particularly when compared to direct competitors such as UPS. Compound annual growth has been 8.92% over the past 5 years and over 10 years FedEx’s revenue growth has been 56.4% better than that of UPS.
The company’s management, still headed up by founder Fred Smith, is strong and has taken good decisions on investments focused on taking advantage on the rise of e-commerce. Systems and logistics technology improvements have taken centre stage and FedEx appears well positioned for its sector’s future landscape. 30% of 2018 capex was allocated towards ‘growth’, a ratio that is more typical of a technology ‘growth’ stock.
As an added bonus, FedEx’s recent share price slump means its current dividend, as a percentage, is the highest in its corporate history.
With China accounting for 13% of its sales, it has been impacted as a result of the U.S.-China trade war. It’s certainly not been the only negative for the aerospace and defence company but has deepened the sell-off which now seems to leave the share price attractively valued. Again, there is no guarantee any turnaround in Boeing’s share price will be immediate but it looks like a strong long term prospect.
The company’s management seems committed to returning value to shareholders and has increased dividends by 325% over 6 years at the same time as buying back 230 million shares. Cash flow from operations has also been consistently grown year-on-year since the turn of the current decade while capex has been held at around $2 billion. Revenues are also locked in for the foreseeable future due to the strength of Boeing’s persistent orders backlog.
Until recently the biggest company in the world and the first $1 trillion company in history as recently as August last year, Apple’s share price has taken a real battering, particularly in early January following the issue of a significant profit warning. iPhone sales in China seriously undershooting forecasts was, if not the only region to struggle, where the company has pinned the blame.
A thawing in U.S.-China trade relations will unlikely prove to be a complete fix as much of the drop in the iPhone’s sales numbers can also be attributed to cheaper competitors closing the technology and design gap. However, all things considered, there is a strong argument that Apple has been oversold. The company initiated a major share buyback programme last year, dedicating a portion of its huge cash reserves to rewarding investors and that will actually be helped by the recent slump in the company’s share price.
Apple has also promised to increase its dividend annually over the next several years which in the worst case, combined with the buyback programme should offer some support for the share price. And while growth has slowed, even dipping into negative territory over the holidays quarter for the first time in several years, cash flow is still very strong. It has even grown while the share price has been falling over the last several months and has more growth potential. All that should mean the current Apple valuation shouldn’t be too far from its floor and could represent a very promising buying opportunity.
The share price of Baidu, the ‘Chinese Google’ has been in decline for some time now and the company suffered a horrendous 2018. However, while at 76%, its domination of the Chinese search engine market isn’t quite as complete as that of Google’s in the U.S. and wider West, it is still an incredibly strong position in a huge market. It has also been boosted by recent news that Google has abandoned its ‘Dragonfly’ project to re-enter the Chinese market after heavy pressure from its own employees and the wider PR disaster its decision to adhere to Chinese state censorship to relaunch proved to be.
The level of internet penetration in China is also still far behind the West and means Baidu’s market has much bigger growth potential over the next decade or so than Alphabet’s Google has. Almost half of the Chinese population still doesn’t have access to the internet as a result of the significant demographic and socio-economic divide that exists between rural and urban and younger and older populations.
Search and other core operations like email hosting and cloud storage facilities have grown steadily and are expected to do so for many years to come. Free cash flow is also a strength with capex consistently 50% below cash flow generated from operations.