Trade war tensions are rattling the markets. The US has hiked tariffs on $200 billion worth of Chinese goods from 10% to 25%. And now China has retaliated with its plans to slap tariffs on $60 billion of US imports starting on June 1. While a full-blown trade war seems unlikely, stocks are still trading sharply lower. However not all is lost. Even in these troubled times, there are still ways to find compelling investing opportunities. Luckily Goldman Sachs has just released a report revealing its trade war investing strategy. The firm advises that the best trade war stocks are services-focused rather than goods-focused stocks.
“Services ﬁrms are less exposed to trade policy and have better corporate fundamentals than goods companies and should outperform even if the trade tensions are ultimately resolved, as our economists expect,” wrote David Kostin, Goldman’s number 1 US equity strategist. “The trading pattern during the past year of tariff announcements and delays suggests services-providing stocks will outperform goods-producing stocks ,” Kostin added.
With this in mind, I took a closer look at some outperform-rated trade war stocks from Goldman Sachs’ basket of services stocks:
Streaming is an increasingly competitive marketplace. And so far Netflix (NASDAQ:NFLX) has appeared relatively bulletproof. However the company is now approaching a critical period. As you know, Walt Disney (NYSE:DIS) is about to release its rival streaming service, Disney +, this November. Will this new, much cheaper, service cut into Netlix’s subscriber numbers? While Netflix standard subscription costs $12.99, Disney is pricing its offering at just $6.99.
Luckily the Street is confident that Netflix can continue to hold its ground. Piper Jaffray analyst Michael Olson has carried out a survey of over 1,500 Netflix subscribers. The results revealed that just 7% of these subscribers plan to cancel their Netflix subscription in favor of Disney’s service. That’s with a whopping 73% planning to continue with just Netflix, and 20% who stated that they would opt to subscribe for both services.
What’s more, Olson argues that if 7% say they will cancel the real figure will probably end up at around 5%. He concludes that the risk of share loss is limited to just a small percentage of the user base, and Netflix will “continue to capture a significant portion of the tidal wave of traditional content dollars that are migrating to streaming.”
The Top 100 analyst reiterates his buy rating with a $440 price target (22% upside potential). “Netflix leads a category that contains material multi-year growth potential. As consumer content dollars shift from traditional TV to streaming, we think the market will support multiple players, with Netflix leading the way.”
Indeed Netflix scores a bullish Strong Buy consensus from the Street. That’s with a $426 average analyst price target. And as far as trade war stocks go, the demand for video streaming is likely to be undercut by tariffs on goods. Want to learn more about Netflix stock? Get a free NFLX Stock Research Report.
The largest cable provider in the US, Comcast Corporation (NASDAQ:CMCSA) has just reported a particularly solid earnings quarter. Broadband revenues grew 10.1% y/y this quarter, with 352K net subscriber additions easily beating the estimated 300K. Even more strikingly, Comcast estimated data usage has increased 34% y/y to over 200 GB per month, which management described as an increasing moat around the business.
With sentiment boosted by earnings, Pivotal Research’s Jeffrey Wlodarczak has now reiterated his buy rating with a $48 price target (12% upside potential). “We reiterate that despite the absence of political advertising in 2H we view the set up for CMCSA stock for the balance of 2019 and especially for 2020 as quite good” cheered the analyst.
According to Wlodarczak there are multiple reasons to be bullish on Comcast right now. These include: 1) likely continued strong data results (subscribers/ARPU) boosted by 30-40% annual increases in bandwidth usage among consumers + cable’s best in class data product; 2) improving cable EBITDA margins; 3) high single digit EBITDA growth for cable and the entire company for 2H of ’19 and for ’20; and 4) strong free cash flow growth. However even at current levels, Comcast’s free cash flow is still ‘attractive’ says Wlodarczak.
And looking ahead “2020 should be a gargantuan year for high margin political advertising” writes the analyst — if anything, the trade war will only increase this demand, making CMCSA a prime trade-war resistant stock. So buy now and hold on tight seems to be the general consensus. Indeed, Comcast shows a Moderate Buy consensus from the Street with 6 recent buy ratings and 3 hold ratings. Get the CMCSA Stock Research Report.
U.S. brings home the bacon earlier than expected, applauded BMO Capital analyst Andrew Strelzik following the company’s impressive Q1 results. McDonald’s Corporation (NYSE:MCD) reported same-store sales growth of 5.4% (including positive global traffic) outpacing the expected +3.4%.
That broke down into strong same-store sales growth of 4.5% in the U.S. (+3.0% consensus) and 6.0% in International Operated Markets. “We are encouraged to see a steeper recovery in U.S. same-sales growth than we had expected and note several positive developments in the market, such as the transition of EOTFs [experience of the future restaurants] to a net positive comp contributor two quarters earlier than expected” summed up Strelzik.
These EOTF restaurants include everything from self-ordering kiosks to air chargers to tablets at tables. In the words of McDonald’s “this is as futuristic as it gets.”
However, there is one fly in the ointment. Cost creep has become a frustratingly consistent limitation to the earnings outlook added the analyst — and this led to disappointing operating profit. Nonetheless Strelzik boosted his price target to $210, which places him just under the average analyst price target of $215.
Indeed multiple analysts hiked their MCD price targets post earnings. Out of 17 analysts covering the trade war stock, 13 rate McDonald’s a Buy with just 4 analysts staying neutral. That gives the stock a ‘Strong Buy’ consensus. Get the MCD Stock Research Report.
The world’s largest software maker, Microsoft (NASDAQ:MSFT) has just held its highly anticipated Build developer conference. At the annual event, Microsoft revealed no less than 25 new updates and features for the Azure cloud platform. Microsoft used the event to showcase new interface paradigms, including HoloLens II (for augmented reality) and Azure Speech Services (for conversational assistants).
Five-star Mizuho Securities analyst Gregg Moskowitz was very impressed by the conference. He has now reiterated his buy rating with a bullish price target of $142. From current levels that indicates upside potential of 15%.
Moskowitz took three key takeaways from Build. First, Azure is now very powerful. In particular, Azure Kubernetes Service is the gold standard in compute service growth. Secondly, Microsoft is branching out its cloud strategy to incorporate Office 365, LinkedIn, Dynamics 365 Online and GitHub. And last but not least: Microsoft is making the right choice to boost its security, with CEO Satya Nadella describing this as a top priority.
“While some additional deceleration is likely to occur over the next year or so, we firmly believe that investor concern about material deceleration is overblown, due in part to our checks that indicate high levels of demand, and given that longer-term contracts are becoming more common” stated the analyst.
Given such bullish sentiment, it’s not surprising MSFT holds a ‘Strong Buy’ Street consensus. That’s with a $142 average analyst price target. Get the MSFT Stock Research Report.
Home Depot (HD)
Home Depot (NYSE:HD) is another ‘Strong Buy’ stock that has found its way into Goldman Sachs’ services stocks basket. Ahead of its earnings report on May 21, 12 analysts out of 15 are coming down in the stock’s favor.
Five-star RBC Capital analyst Scot Ciccarelli is one of these analysts. He has just reiterated his HD buy rating with a $217 price target (15% upside potential). Ciccarelli is clear that HD continues to represent an attractive investing proposition, but he also advises investors to hold realistic expectations given adverse weather/ moderating macro trends.
“We still think HD and LOW can be attractive stocks/have solid growth algorithms… However, we suspect that following a near-decade of material outperformance, the days of 15%-20%+ EPS growth may be in the past” the analyst writes. Specifically he believes that HD could still generate 3%-5% comps, MSD+ EBIT $ growth and HSD/LDD EPS growth with buybacks and produce a 2%-3% dividend yield.
Interestingly, Ciccarelli advises investors to pick Home Depot over rival home improvement store Lowe’s (NYSE:LOW). “We continue to prefer HD on relative basis, especially if the broader environment remains a touch slower than in recent history (i.e., lean into the market leader in a slower market)” he writes. Get the HD Stock Research Report.
TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.
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