US-China Work Out Trade Truce: 5 Top Winners

The United States and China have agreed to “substantially” lessen trade deficit following two days of negotiations. China promised to “significantly” purchase U.S. goods and services that soothed investors’ nerves to a fair extent.

Receding possibility of collateral damage from China trade war helped industrial, technology and energy stocks gain ground. Thus, investing in such stocks, for now, seems to be a wise choice.

What’s Powering the Markets?

Investors were perked up by Treasury Secretary Steven Mnuchin’s statement that the White House will suspend tariffs on $150 billion worth of Chinese goods. The Trump administration will continue to work on the deal between the economies to “put the trade war on hold.”

U.S. Trade Representative Robert Lighthizer, however, said that Washington might impose tariffs. Nonetheless, Mnuchin insisted that the administration is unified on the China trade deal.

Potential Winners as Trade War Fears Ebb

A truce between the nations has alleviated risks in the equity market for now. A full-blown trade war would have had rippling effects on the global economy growth, casting a pall over businesses. Let us now look at stocks that have benefitted from the easing of trade tensions with China:

Industrials Lead the Way

Progress in trade talks has helped the Dow Jones Industrial Average close above the coveted 25,000 mark on May 21. The biggest percentage gainer on the blue-chip index was The Boeing Company (NYSE:BA) , up 3.6%. After all, the aerospace giant sells about a fourth of its commercial aircraft to Chinese customers.

By the way, China was supposed to impose tariffs of up to 25% on 106 American products, including airplanes, with empty weights between 15,000 kg and 45,000 kg. This would have affected Boeing’s 737-800, 737-700 and 737-900 ER models as their operating empty weights fall in the range targeted by China. But, with tariff scares behind us for now, Boeing has ample reasons to rejoice.

Chipmakers Tread Higher, Tech Stocks Make Merry!

Within the Dow, Intel Corporation (NASDAQ:INTC) also saw its shares jump 1.5%. And why not? Intel generated 22.9% of revenues from China in the last 12 months, per FactSet. In comparison, the semiconductor company’s 20% of revenues came from the United States.

China, in fact, heavily relies on U.S. chipmakers, while semiconductors make up one of its largest import categories in terms of value. Hopes of a thaw in U.S.-China trade tensions provided strength to the chip sector. The PHLX Semiconductor Index advanced 1.1% compared with a 0.7% gain of the S&P 500.

Elsewhere in the chip sector, shares of KLA-Tencor (NASDAQ:KLAC), Lam Research (NASDAQ:LRCX), Qorvo Inc and Micron Technology (NASDAQ:MU) ended in the positive territory (read more: Chip Stocks Offer Upside Even After Red-Hot Years: 5 Picks).

The broader tech sector has also a lot to gain from reduced trade war fears. The components of the SPDR Technology Select Sector had seen 9.6% of total revenues in the last 12 months come from China, per FactSet data. This puts China in the second place in terms of revenue generation, behind the United States.

Oil Springs High, Energy Shares Gain

Meanwhile, Beijing promised to import more liquefied natural gas (LNG) and U.S. crude. This will, in fact, help the U.S. take the position of the third largest LNG exporter globally.

Thus, an economic truce between the United States and China helped oil prices approach $72 a barrel. Energy shares are looking up after they fell out of favor when oil price slipped from $100 a barrel to under $30 in 2014. In fact, the energy sector of the S&P 500 has risen more than 10% in the past month to garner 9.2% so far this year (read more: Oil Hits $70 for First Time in 4 Years: 5 Top Energy Picks).

5 Top Gainers

As trade war worries dissipate and broader markets move north, investing in stocks from the aforesaid sectors making the most of the recovery seems judicious. We have, thus, selected five stocks that can make the most of the encouraging trend. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Boeing manufactures, sales, services, and supports commercial jetliners. Its key customer is China. The company has a Zacks Rank #2. In the last 60 days, nine earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has moved 4% up in the same time frame. The stock’s expected growth rate for the current year is 21.4% versus the Aerospace - Defense industry’s projected rally of 14.4%.

Caterpillar Inc. (NYSE:CAT) invests heavily in China as it vies for the position of the world’s largest construction and mining equipment maker. The company has a Zacks Rank #1. In the last 60 days, 10 earnings estimates moved up, while none moved lower for the current year. The Zacks Consensus Estimate for earnings has risen 15.8% in the same period. The stock’s expected growth rate for the current year is 53.8% versus the Manufacturing - Construction and Mining industry’s estimated rally of 15.5%.

Diodes Incorporated (NASDAQ:DIOD) is a Texas-based company which designs, manufactures, and supplies application-specific standard products in the discrete, logic, and analog and mixed semiconductor markets internationally, including China. The company has a Zacks Rank #2. In the last 60 days, one earnings estimate moved up, while none moved lower for the current year. The Zacks Consensus Estimate for earnings has climbed 2.6% in the same time frame. The stock’s expected growth rate for the current year is 45.9% versus the Electronics - Semiconductors industry’s estimated rally of 3.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Texas Instruments Incorporated (NASDAQ:TXN) designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide, including China. The company has a Zacks Rank #1. In the last 60 days, 13 earnings estimates moved up, with no movement in the opposite direction for the current year. The Zacks Consensus Estimate for earnings has moved 9.3% up in the same time frame. The stock’s expected growth rate for the current year is 26.9% versus the Semiconductor - General industry’s projected rally of 23.4%.

CNOOC Limited (NYSE:CEO) produces offshore crude oil and natural gas primarily in Bohai, Western South China Sea, Eastern South China Sea, and East China Sea in offshore China. It also holds interests in various oil and gas assets in Asia, Africa, North America, South America, Oceania and Europe. The company has a Zacks Rank #2. In the last 60 days, two earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings has moved 1.3% up in the same time frame. The stock’s expected growth rate for the current year is 83.3% versus the Oil and Gas - Integrated - Emerging Markets industry’s projected rally of 40.8%.

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