Trade Wars And U.S. Monetary Policy
If you follow me, you know I've been vocal about the potential impacts President Trump's Trade War and a hawkish Fed could have on American Corporations who derive noteworthy portions of their revenues outside of the United States.
In one of my recent articles, in which I discussed the current political climate's potential impact on Boeing (BA), I wrote the following quote:
"I want to stress the severe threat the combination of a lengthy trade war and overly hawkish Fed pose to the state of the global economy. The combination of a stubborn U.S. Fed dependent on U.S. economic data in isolation and an even more stubborn President bent on dismantling an economy on which the global growth narrative relies could create economic calamity."
Although we haven't witnessed widespread economic calamity yet; nor am I saying I'm ultra-bearish at present, we have seen calamity transpire in certain sectors and for certain companies. FedEx (FDX) was one of the first dominoes to fall late last year, and yesterday, we received news that Apple (AAPL) has been experiencing the ill-effects of U.S. - Chinese policy.
Ill-Effects Revealing Themselves
In a recent article, in which I discussed Apple's current headwinds, I discussed the implications of a hawkish U.S. Fed for the company. I predicted that a strengthening U.S. dollar would negatively impact Apple's sales abroad, as many others have.
"If the Fed acts too aggressively in raising rates and transitioning from QE to QT, then the U.S. economy and certainly the economies abroad may grind into a slowdown... Even without a global economic slowdown created by a strengthening dollar, international consumers will be less apt to buy an iPhone if its price increases for them as their currency weakens against the U.S. dollar."
Additionally, I expressed uncertainty regarding ASPs. "There’s only so much ASPs can rise, though they’ve proven to be able to rise more than I would say many have speculated. Nobody can be certain as to the elasticity of the iPhone..." Well, yesterday we were given yet another clue as to the phone's elasticity (read: it isn't perfectly inelastic).
Though I am ultimately an Apple bull, and global economy bull, long term, I believe these three factors, (1) a hawkish U.S. Fed, (2) Strengthening U.S. Dollar, and (3) Fraying U.S. - Chinese relations: Nationalistic Response to the Trade War(Another example found in paragraph four) will continue to impact, in the near term, Apple's net sales and U.S. companies with international exposure. Apple products in China, which account for 19.6% of Apple's total sales, will continue to suffer especially as a result of all three aforementioned factors and higher iPhone ASPs.
But it's not just Apple, virtually all of my articles have discussed the unique implications of a trade war, strengthening dollar, and fraying Chinese relations for individual companies. These implications have been universally negative, and as a result, the share prices of these companies have experienced downward pressure, which, from a positive vantage point, has created buying opportunities.
Quality Stocks That Have Gone On Sale
FedEx (Buy Zone: $155-$165)
Before I get into the reasons to buy FedEx, I want to point out that the company's RSI (which determines the extent to which a stock is overbought or oversold) is firmly in "oversold" territory still; however, it still remains in a bearish downtrend.
Reasons To Buy
1. Relatively Fast Growing Revenues
The company has grown its top line at a CAGR of 8.92% over the past 5 years. Additionally, because management has used shareholder capital so wisely, its revenue growth has outstripped UPS's revenue growth (27.9%) by 56.4% over the course of 10 years. In other words, FedEx has grown its top line 84.3% from 2008 to 2017; whereas, UPS has grown its top line 27.9% from 2008 to 2017.
2. Excellent Management
Management, led by the company's founder Fred Smith, has positioned itself strongly to meet the demands of e-commerce through massive capital expenditure on growth initiatives, hub automation, and technological enhancements. The company operates as if it were a growth company, with 30% of its 2018 capex having been devoted to "growth" according to management in their fiscal year 2018 Annual Report.
3. Record High Dividend
Currently, the company has the highest dividend yield in company's history due to market overreaction.
What I find interesting is that FedEx's last dividend spike occurred during 2008 and 2009, and did not precede the economic turmoil the world experienced.
Investors often cite transports as being indicators of economic turmoil, which leads me to believe that perhaps now is the perfect time to buy, and we presently are experiencing the worst of economic conditions. I could, of course, be wrong.
Boeing (Buy Zone: $290-$310)
So Boeing hasn't exactly gone on sale because the company has had so much positive news as of late despite fraying U.S. Chinese relations, from which Boeing derives about 13% of its revenues. Nevertheless, we have seen a decline, and there's a chance the stock isn't completely out of the water yet. However, the company seems attractively priced.
Reasons To Buy
1. Share Count Reduction
"With the latest dividend increase, BA says it has increased its dividend nearly 325% over the past six years and repurchased more than 230M shares over the same time period." Boeing's team is relentlessly committed to returning capital to its shareholders, a quality one must favor when selecting securities in which to invest.
2. Robust, Growing Free Cash Flow
As the graph above illustrates, Boeing has grown its cash from operations virtually every year since 2010. Additionally, the company has been able to keep its capex static at around $2B, which has allowed shareholders to reap the benefits of strong cash flows.
3. The Perennial Order Backlog
Note: BCA (a segment of Boeing's business) develops, produces and markets commercial jet aircraft, principally to the commercial airline industry worldwide.
Boeing's enormous backlog has persisted for many decades and should persist into the foreseeable future, possibly until we reach intergalactic space travel.
Apple (Buy Zone: $135-$145)
Reasons To Buy
1. Share Count Reduction
Like Boeing, Apple has set about to return shareholder capital through massive buyback programs.
Although there is currently fear and blood in the streets for Apple, it's proven to actually be ideal for their buyback program, 70% of which was not completed at the end of September 20, 2018.
Read the (1) footnote, in which Apple describes their progress in repurchasing shares. The first tranche of share buybacks was not bought at ideal prices in any sense; however, I suspect the next tranche will be bought in the $140s, a much more appealing price with which to return shareholder capital.
2. Dividend Increases
Apple has made it expressly clear that they intend to increase their dividend yearly for the foreseeable future. If nothing else props up the share price, an increasing dividend backed by massive, stable free cash flow will at least provide shareholders some sense of security as management determines the next paths to create growth for the company.
Currently, Apple pays a yearly dividend of $2.92, which represents a cash payout ratio (dividend/fcf) of 21.8%. "On May 1, 2018, the Company also announced the Board of Directors raised the Company’s quarterly cash dividend from $0.63 to $0.73 per share, beginning with the dividend paid during the third quarter of 2018. The Company intends to increase its dividend on an annual basis, subject to declaration by the Board of Directors."
3. Stable Cash Flow With Potential For Growth
Apple's brand loyalty and highly convenient ecosystem enable it to sustain enormous cash flows, with which it plans to pay its shareholders.
Their cash flow has actually grown in the last year or so while the company's valuation has declined. There is precedent for an even lower valuation with the company's present cash flows, but the floor is very near from my perspective.
Baidu (Buy Zone: $155-$170)
Reasons To Buy
1. Economic Moat
Baidu (BIDU) dominates the Chinese search market, and recently, it further secured its position as the most dominant search engine when Google ended its project "Dragonfly".
2. Growth Of The Chinese Search Market
Chinese internet penetration has many years, if not decades, of growth ahead of it.
As the chart illustrates, "only" 771.98 million Chinese citizens have access to the internet, which leaves another approximately 600-700 million person addressable market. With a secure foothold in the search market, protected by the Chinese government, Baidu will look to capitalize on the growth of internet use in China for many decades to come.
3. Strong Financials With Stable Growth
Baidu has seen steady growth from its core operations of search and its related suite of products (similar to gmail, google drive, etc.).
Additionally, it has demonstrated an ability to generate free cash flow, with capex that is consistently less than cash from operations by about 50%.
Takeaway
I like to buy great companies at even better prices, which usually only come about through negative, temporary developments, such as recessions or controversies. In the market, it's easy to buy a great company; however, the challenge arises in buying the company at a great price.
From my perspective, these companies have weathered the worst of what the Trade War and a Hawkish Fed have to offer, and as a result, they have become priced very attractively.
For more information regarding the prospects of the stocks contained in this article, check out more in-depth analyses of FedEx, Boeing, Apple, and Baidu. As always, analyze your own investment timeline and goals so as to determine what best fits you.
