Are Tariff War Fears Overblown? 5 Great Value Choices

The Dow emerged from four straight sessions of losses to finish in the green on Monday. The ascent was largely attributable to a reduction in fears triggered off by President Trump’s recent tariff announcements. Key members of his administration remained evasive over the likelihood of such plans actually reaching fruition. Additionally, leading Republicans strongly voiced their opposition to such a move.

Meanwhile, a section of analysts have questioned whether such tariffs will actually come into force. They have repeatedly pointed at Trump’s own tweets on the issue, where he more or less indicates that this could merely be a bargaining tactic to gain leverage ahead of future NAFTA negotiations.

Also, Trump has been extremely sensitive to market movements, taking credit for equity gains on more than one occasion. This is why he is also likely to take further market losses caused by his remarks into account before taking the final call on the issue. Taking these factors into account, stocks could soon begin racking up steady gains. This is why it makes sense to pick up great value stocks while the situation remains volatile.

GOP Leaders Critical of Tariffs, White House Evasive

House Speaker Paul Ryan was among the leading GOP leader to voice his resentment on the issue of steel and aluminum tariffs. AshLee Strong, a spokeswoman for Ryan said the Speaker was “extremely worried about the consequences of a trade war.” Strong added that Ryan was “urging the White House to not advance with this plan” since it could “jeopardize” the economic benefits reaped from recent tax cuts.

Meanwhile, Commerce Secretary Wilbur Ross remained largely evasive when questioned during a television interview as to whether Trump would actually go ahead with the proposed tariffs. White House press secretary Sarah Huckabee Sanders also provided inconsistent responses on the issue, giving the impression that the tariffs were far from a done deal.

Tariffs Only a Negotiating Tactic?

The President himself indicated that the decision to actually go ahead with the tariffs was contingent on the amount of headway made on NAFTA negotiations. Trump suggested that fresh terms from Mexico and Canada could exempt these countries from the import taxes. On Monday, the President tweeted that “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed."

A significant section of analysts also felt that the trade tariff impasse could end with a diplomatic solution. They pointed toward the fact that Caterpillar (CAT) and Harley-Davidson (HOG) gained 3.2% and 2.3% on Monday. Both these stocks are expected to be hugely be impacted by these import taxes. Traders also felt that Trump’s NAFTA related comments showed that he was ready to adopt a flexible approach.

Targeted, Muted Response Likely

Over the weekend, Trump had argued that trade wars may actually be good for the U.S. economy. But on Monday he changed tack, saying: “I don’t think we’ll have a trade war.” Trump’s rationale throughout this episode has been that the United States is too large a market to ignore or rile up beyond a certain point. And given the initial response of the countries likely to be most affected by his tariffs, this seems to be largely true as of now.

Canada’s Prime Minister Justin Trudeau called Trump on Monday to say that tariffs could only impede NAFTA stocks further. Canada and Mexico have threatened to retaliate, but only in a targeted fashion.

Meanwhile, the EU has said that it will impose tariffs on classic American products such as bourbon, jeans and Harley motorcycle, but doesn’t seem keen on further measures at this point. China has asked Trump to be cautious on the issue but has stopped short of specific trade-related measures.

Our Choices

Trump’s NAFTA related comments show that the President is yet to make up his mind on tariff related announcements. Meanwhile, though Trump has received some bipartisan support on the issue, the GOP remains largely opposed to the idea. More importantly, countries that will be severely impacted by such tariffs have largely issued a targeted and muted response.

These developments suggest that fears surrounding a tariff war may be largely overstated. Hence it makes sense to buy value stocks in the interim that that could prove to be valuable finds once the rally resumes in earnest. Our selection is also backed by a good Zacks Value Score and a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value-investing space.

Centene Corporation CNC is a well-diversified, multi-national healthcare company that primarily provides a set of services to the government sponsored healthcare programs. Centene has a Value Style Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 14, lower than the industry average of 17.24. It has a PEG ratio of 0.97, lower than the industry average of 1.30.

Macy's, Inc. M is one of the leading department store retailers in the United States. It holds a Value Style Score of A and has a P/E (F1) of 8.64x compared with the industry average of 14.68. Macy's has a PEG ratio of 1.02, lower than the industry average of 1.32.

LyondellBasell Industries N.V. LYB is among the leading plastics, chemical and refining companies globally with operations across 18 countries, with a Value Style Score of A. LyondellBasell has a P/E (F1) of 9.97x, lower than the industry average of 14.67. It’s PEG ratio of 1.11 is also lower than the industry average of 1.40.

Huntington Ingalls Industries, Inc. HII designs, builds and maintains nuclear-powered ships and non-nuclear ships, and provides after-market services for military ships around the globe. Huntington Ingalls has a Value Style Score of B and a P/E (F1) of 15.01x, lower than the industry average of 20.46. It has a PEG ratio of 1, lower than the industry average of 1.80.

Lam Research Corporation LRCX supplies wafer fabrication equipment and services to the semiconductor industry. Lam Research has a Value Style Score of B and a P/E (F1) of 11.62x, lower than the industry average of 14.07. It has a PEG ratio of 0.78, lower than the industry average of 1.26.

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