Your Playbook for the Coming Trade War

Did Trump just start a trade war?

As I showed you yesterday, Trump recently announced his plan to put tariffs on steel and all imported aluminum…

I told you how steel stocks will be the real winners from Trump’s tweet. We’ve seen the main four U.S. steel producers rise an average of 18% in the past month—and I believe we’ll continue to see even bigger gains over the next few years.

But here’s the thing: while these tariffs will be great for the top steel companies, they’re terrible for the rest of the economy.

What’s more, these tariffs mean there’s a very real possibility a new trade war just started… one that will have major ramifications for the U.S. and certain companies.

In a minute, I’ll tell you which companies will become casualties… and which ones should get by relatively unscathed.

There’s a certain way to play this, which I’ll explain below, that can make a huge difference in your portfolio in the coming months.

But before we get to that, we need to look at how trade wars start and what they mean for the economy…

Trade Wars Cost Money

All wars are expensive and trade wars are no exception. A year ago, I talked about a minor trade skirmish between the U.S. and China.

To recap, U.S. tire producers complained that the Chinese were dumping tires on the market. And in 2012, former President Obama put a tariff on Chinese tires. This helped U.S. tire manufacturers, but it made tires more expensive for you and me.

China retaliated. They went ahead and put a tariff on chicken feet. And apparently, we send a lot of chicken feet over to China. American chicken producers lost over $1 billion in sales because of this.

All in all, this little skirmish cost the American economy at least $2.1 billion.

And it’s going to happen again.

Right now, people from the eurozone and Canada feel slighted by these tariffs. These tariffs actually hurt our allies more than they hurt the intended target—China.

Politicians from the EU and Canada are talking about such tariffs. And keep in mind… these tariffs don’t even have to be major to do damage to Trump. Small, targeted tariffs could be enough to turn a state against Trump and Republicans.

Rumors are circulating about putting a tariff on Harley-Davidson motorcycles. That could be enough to turn the entire state of Wisconsin against Trump. Higher tariffs on Jack Daniel’s whiskey could do the same over in Tennessee.

It wouldn’t hurt citizens of the EU or Canada much if there were tariffs on those products. But it would do damage to Harley-Davidson and Brown-Forman, the parent company of Jack Daniel’s.

In short, these companies could become early casualties of a trade war.

How to Prepare for a Trade War

We’re going back to our early playbook in how to handle the turmoil—buy small companies that do most of their business in America. And avoid multinational companies.

Multinational companies can get caught in the crossfire. As we’ve said before, companies in the S&P 500 get 47% of their sales from foreign countries. That means almost half of those sales are in jeopardy as trade war talks intensify.

So we should look closely at which large companies we want to hold. And holding a basket of large caps like the S&P 500 is a bad idea.

The winners will be small companies that do a majority (or all) of their business in America. These are companies that buy from American suppliers, and then sell their products to Americans.

Tariffs and other protectionist measures won’t affect these guys much. Their products don’t go across borders.

I expect small caps to outperform large caps if a trade war gets underway.

In fact, we’re already seeing this play out. On Friday, the small-cap Russell 2000 was up 1.6% on the day. The Dow—big multinationals—was down 0.3%.

The easy, one-click way to own small cap stocks is to buy the iShares Russell 2000 ETF (IWM). These companies should be good investments while this whole trade situation plays out.

Regards,

Nick Rokke signature
Nick Rokke, CFA
Analyst, The Palm Beach Daily

CHART WATCH

Steel Prices Soar

Steel prices have been rising since October.

The talks of the $1 trillion in infrastructure spending started the initial rally in U.S. steel.

As you can see, steel prices rallied hard since October, going up 26% even before Trump mentioned the new tariffs.

chart

And after Trump announced his intentions to place a tariff on steel, it went up another 13%.

Now, it’s up 42% from the October lows.

But whether or not you agree with these tariffs, if enacted, steel prices will be pushed up even further. And that will lead to more profits in the pockets of U.S. steel producers.

This should be a good year for U.S. Steel, AK Steel, Nucor, and Steel Dynamics.

— Nick Rokke

MAILBAG

Today, a question about Nick’s Elite 25 portfolio.

But first…

Dear Teeka and the entire staff at PBRG,

I just want to thank you for the useful and timely information I receive from The Palm Beach Letter. I am a rookie investor and I’m trying to learn how to be successful with a limited amount of financial resources, which is quite challenging.

Especially difficult is learning how to invest in cryptocurrencies. Cannabis and cryptocurrencies are where I’m focusing on learning, along with pharma stocks. Hopefully, more information on cryptocurrencies will be forthcoming soon. Meanwhile, I’ll keep reading and learning. Thanks again.

– Ronn J.

Nick: Hi Ronn, thanks for writing in.

There’s no better place to get an education in cryptocurrencies than the Palm Beach Letter Crypto Corner. It’s got everything you’ll need to get started investing in this exciting space. Palm Beach Letter subscribers can access it right here.

Nick/Teeka,

Just curious. It seems like O’Reilly Automotive (ORLY) would be mighty dangerous, because Amazon (AMZN) is getting into the auto parts business. Why would you include that one in the Elite 25?

– Tim S.

Nick: Hey Tim, thanks for your note.

You’re right – there are lots of reasons not to own O’Reilly Automotive. But there are lots of reasons not to own lots of stocks on the Elite 25 list.

For example, Foot Locker is a victim of the retail apocalypse. People are buying more shoes online. But that hasn’t stopped it from gaining 30% since fall of last year.

National CineMedia supposedly has fewer people watching their ads before movies… because people would rather stay at home to watch Netflix. But it’s up 40% since last fall.

Despite all the negative attention, both these companies have gone up a lot since they bottomed this past fall.

But the thing you shouldn’t overlook is that despite the negativity surrounding these companies, they’re still thriving.

It’s not easy to be considered a quality company. You have to be extremely profitable, growing, and trading cheaply.

And for quality companies to trade cheaply, there has to be some negativity with their stories. Otherwise, they’d be expensive… like Netflix, Amazon, or Tesla.

So, despite all the negativity around O’Reilly Automotive, it’s still very profitable. And we’ll keep holding until the Elite 25 algorithm tells us it’s either lost its Elite status or becomes too expensive.

Are you following Nick’s Elite 25 portfolio? Has it made you money in the past year?

Send us your experiences… and any other questions, suggestions, or thoughts… right here.

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Posted in Palm Beach Daily