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3 Stocks Immune to the U.S.-China Trade War

By John Ballard - Jan 31, 2020 at 7:20AM

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Steer clear of the trade chaos with these three stocks.

The U.S. and China recently signed the first phase of a trade agreement, which should give investors hope that the two sides will eventually reach a final resolution. Some companies have experienced significant disruption to their operations because of dependency on sourcing inventory from China. 

While there is no way to predict what the outcome of the U.S.-China trade war will be, you can steer clear of that uncertainty altogether by investing in companies that do zero business in China. Three stocks with no exposure to China are Southwest Airlines (LUV 1.78%), Vail Resorts (MTN -0.28%), and Netflix (NFLX 1.98%).

A hand moving a pawn on a chess board.

Image source: Getty Images.

1. Southwest Airlines: A consistently profitable domestic airline

Southwest Airlines just reported its 47th consecutive year of profitability, an impressive accomplishment given the bankruptcies that plagued the airline industry several years ago. It is historically the most profitable airline among its larger peers, and since its focus is on domestic routes, it is virtually immune to the trade war. 

However, the stock has underperformed the broader market over the last year due to the grounding of the Boeing 737 MAX. This dependency cost Southwest $828 million in operating profit last year, but the company still reported a record in full-year earnings. 

Boeing is compensating Southwest for the financial losses, but with the MAX not expected to be approved for flying until later this year, this will continue to be a drag on Southwest's performance. 

Looking at the big picture, this could be a great time to consider buying shares. Airlines usually trade at lower valuations to the market average, but Southwest's current forward P/E of 10.5 and dividend yield of 1.3% are tempting. 

While the MAX grounding disrupted Southwest's growth plans to expand its routes to Hawaii, this is an attractive long-term opportunity. On top of Hawaii, Southwest may pursue expansion beyond the U.S. to drive growth. 

2. Vail Resorts: A top resort operator in North America

Vail Resorts operates some of the most iconic ski resorts in the world, and none are in China. Some of the notable resorts it owns are Whistler Blackcomb in Canada, Vail Resort in Colorado, and Park City in Utah. Over the last 10 years, the stock is up 585%, significantly outperforming the broader market, and there could be more in store for investors. 

Favorable travel industry trends have helped Vail Resorts deliver solid operating performance in recent years. But a key driver of growth has been acquisitions. Its most recent acquisitions include Peak Resorts, Fall Creek, and Hotham in Australia. Management is eyeing other acquisition candidates to build out its resort network around the world, including resorts in Europe and the Asia-Pacific region.

Vail Resorts just reported lower-than-expected early results for the current ski season through Jan. 5, 2020. Poor snowfall at Whistler Blackcomb, which came in at 60% below the 30-year average, was blamed for the lackluster performance. However, management reported that "conditions have improved" at Whistler in recent weeks. 

Management is still holding firm to its previous operating profit guidance for the current fiscal year based on strong season pass sales through the holidays. Selling more season passes has been a successful strategy for Vail Resorts to mitigate the unfavorable swings in the weather, providing more stability in annual revenue. 

The stock trades at a rich forward P/E of 28, reflecting the company's past and future growth prospects. Vail Resorts also pays a generous quarterly dividend of $1.76 per share, which comes to a current yield of 7.06%. But keep in mind, the payout is subject to quarterly review and could be reduced if earnings dipped due to a recession. 

Nonetheless, Vail Resorts has a lot to offer investors looking for a growth stock that doesn't have exposure to China.

3. Netflix: Available in many countries, but not China

Netflix offers its streaming content in over 190 countries, but you won't find China on that list. It's unlikely Netflix will ever be a player in that country because of the stronghold that local services, like iQiyi, have on the Chinese market. Netflix previously partnered with iQiyi to license some of its content for distribution in China, but the two companies parted ways after Netflix's content never really connected with the preferences of Chinese viewers.

Despite the competition of the recently launched streaming services from Disney and Apple, Netflix delivered stellar growth in the fourth quarter. Revenue increased by 30.6% year over year while operating margin improved 320 basis points to 8.4%. The only negative was that Netflix only added 420,000 net subscriber additions in the U.S. and Canada, which management attributed to subscription price changes and competition. 

Overall, it appears management's strategy to spend aggressively on new content is paying off with strong growth on the top line. While Netflix is reporting negative free cash flow as a consequence of that spending, management's plan is to "continually improve" free cash flow every year starting this year. 

Netflix now has 167 million members worldwide. Viewing per membership is increasing, and revenue is still growing at robust levels. All told, this growth story is far from over.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$195.19 (1.98%) $3.79
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$45.80 (1.78%) $0.80
Vail Resorts, Inc. Stock Quote
Vail Resorts, Inc.
MTN
$252.94 (-0.28%) $0.72

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