The escalating trade war between the U.S. and China is rattling the markets and stoking fears of a global recession. Faced with those uncertainties, investors might consider selling some stocks or pivoting toward safer investments like bonds instead.
Those moves would be prudent, but there are still plenty of stocks that are well insulated from the Trump administration’s tariffs and government-mandated blacklists of foreign companies. Today, I’ll highlight my three favorite stocks for weathering a prolonged trade war — Cisco (NASDAQ:CSCO), LVMH (NASDAQOTH:LVMUY), and Veeva Systems (NYSE:VEEV).
1. Cisco, the world’s top networking hardware company
Cisco is the world’s top manufacturer of networking routers and switches. It also sells wireless hardware, collaboration software, and cybersecurity solutions.
Cisco generates only about 3% of its sales from China, and CEO Charles Robbins stated that the company would see a “very minimal impact” from the tariff hikes during last quarter’s conference call. Furthermore, the Trump administration’s war against Huawei benefits Cisco, since Huawei is one of its top rivals in the switching and router markets.
Cisco was once a slow-growth stock, but its growth accelerated significantly in recent quarters as enterprise campus customers upgraded their networks. Cisco’s acquisitions of smaller application and cybersecurity companies complemented that growth, as it bundled their software products with its networking hardware.
Cisco’s revenue rose 3% last year while its adjusted EPS — buoyed by buybacks — rose 9%. For the current year, analysts expect its revenue and adjusted earnings to rise 5% and 18%, respectively, which are robust growth rates relative to its forward P/E of 16. It also pays a forward dividend yield of 2.7%.
2. LVMH, the world’s biggest luxury goods company
LVMH’s portfolio includes 75 brands of leather goods, jewelry, watches, perfumes, cosmetics, wines, spirits, and other upscale products. Its most well-known brands include Louis Vuitton, Dior, Loewe, Bvlgari, Moet & Chandon, and Sephora.
LVMH is better protected from the trade war for two reasons. First, it’s based in France, and the EU isn’t engaged in a trade war with China. Second, LVMH’s affluent customers still shop during economic downturns. During the financial crisis, LVMH’s sales dipped only slightly in 2009 before rebounding with double-digit growth the following year.
LVMH’s organic sales rose 11% in 2018, its operating margin expanded, and its net profit jumped 20%. That growth continued in the first quarter of 2019, indicating that trade tensions weren’t throttling demand for its luxury goods. Louis Vuitton CEO Michael Burke even recently stated that the iconic brand was generating “unheard-of growth” in mainland China — which indicates that China’s economic slowdown isn’t affecting its most affluent consumers.
LVMH isn’t cheap at about 28 times earnings, but its strengths justify that premium, and it pays a decent forward yield of 2.4%.
3. Veeva Systems, a high-growth cloud services company
Veeva Systems offers a suite of cloud services that help drug companies track customer relationships, industry regulations, clinical trials, prescribing habits, and other data. It serves more than 750 customers, including pharmaceutical giants GSK, AstraZeneca, and Novartis.
Veeva is insulated from the trade war because it thrives on the competition among those companies. It also locks in customers by cross-selling new features like the Veeva Nitro data warehouse, employee training tools, and Veeva Andi — an AI application that crunches and analyzes data.
Last year, Veeva’s revenue rose 25%, and its adjusted earnings surged 70%. It expects its revenue to rise 21% to 22% this year, and analysts expect its earnings to grow 18%. Those growth rates are robust, but Veeva’s stock is a bit pricey at over 70 times forward earnings.
I recently attributed that high valuation to two factors: Its dominance of a high-growth niche and the safe-haven status of cloud stocks during a trade war. Therefore, I might start a small position at these levels, but I’d wait for a bigger pullback to buy more shares.
