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

By Rich Smith - Feb 19, 2020 at 10:29AM

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Look for stocks that have few ties to China, or those forbidden by law to trade with it.

The coronavirus outbreak is garnering all the headlines in China news lately -- and rightly so. The scale of the health crisis is getting truly frightening.

But as with past health scares, this too shall pass. Already, vaccine makers are hard at work developing cures to COVID-19, and the primary limiting factor will be getting governments to approve them. Once the coronavirus fades from the headlines, though, a more durable China concern will remain: the U.S.-China trade war.

Two fists meet, one emblazoned with Chinese flag and one with U.S. flag

Image source: Getty Images.

Trade war over? Not really.

You may have heard that President Trump called a truce in his trade war back in January, and that's sort of true. On Jan. 15, the U.S. and China did sign a preliminary agreement that could see some tariffs on Chinese goods rolled back, while China authorizes the import of about $200 billion in new U.S. goods.  

Despite this progress, however, "the majority of the border taxes remain in place," reports the BBC. And the U.S. Chamber of Commerce warns that "there's a lot of work to do ahead." For example, China still has elevated tariffs on $110 billion worth of U.S. products in place, and the U.S. has raised tariffs on $360 billion worth of Chinese goods. Meanwhile, a Department of Justice indictment of Chinese tech giant Huawei for racketeering and theft of trade secrets, filed last week, threatens to heat up the trade war even further.  

With the end of this tunnel increasingly far from sight, how can investors best insulate their portfolios from trade war shocks? Here's one piece of sound advice: Buy stocks that are entirely (or at least mostly) immune to the effects of the U.S.-China trade war -- stocks such as Lockheed Martin (LMT 1.88%), Chipotle Mexican Grill (CMG -1.12%), and ServiceMaster (TMX 3.73%).

Here's why I believe these are all good bets.

Lockheed Martin

Lockheed Martin is the world's biggest pure-play, publicly-traded defense company -- in more ways than one. With a market capitalization of more than $120 billion, nearly $60 billion in annual sales, and $6.2 billion in annual profit, it's undeniable that Lockheed Martin is big. But since 1989, the U.S. has had an arms embargo on sales to China.

Thus, Lockheed Martin's immunity to the U.S.-China trade war is essentially codified into law. It cannot profit by selling weapons to China, but by the same token, neither can it be hurt by China's refusal to buy weapons or tax weapons imports.

Admittedly, Lockheed's not totally immune to Chinese business. From time to time, a Chinese company might buy the odd helicopter from Lockheed's Sikorsky business, for example. But such sales are the exception rather than the rule. The vast majority of Lockheed's $5.8 billion in annual sales to the Asia Pacific region (data provided by S&P Global Market Intelligence) go to countries antagonistic to China, buying LockMart hardware to help hem China in.  

For the most part, Lockheed Martin seems immune to the U.S.-China trade war.

Chipotle Mexican Grill

A more fortuitous immunity to the trade war can be found in American restaurateur Chipotle Mexican Grill. Although it has ventured cautiously outside U.S. borders, opening restaurants in Canada and Europe for example, the company's international expansion plans haven't progressed as far as China yet. In fact, 98.5% of all Chipotle restaurants in operation today are still situated right here in the U.S.

By definition, this limits the company's exposure to China, because Chipotle sells no food in China.

Indeed, even if there were a risk coming from the other direction -- of China cutting off the supply of some key ingredient (do those burritos come with a side of rare earth metals?), for example -- you could assume that Chipotle would be working to avoid such risk thanks to its famed emphasis on serving its customers fresh, locally sourced foods.

Still one of the fastest-growing restaurant chains in America, with sales up 18% last quarter and profits more than doubled, Chipotle is entirely immune from the U.S.-China trade war.

ServiceMaster

This is even more true for ServiceMaster. For a long time, foes of offshoring have opined that, if you're worried about your job getting outsourced to China, you should learn a trade that, by definition, can only be performed locally -- such as gardening, electrical work, or plumbing. To that list, I might add home inspecting, house cleaning, or pest exterminating -- three professions that can be found under ServiceMaster's AmeriSpec, Merry Maids, and Terminix brands.  

ServiceMaster isn't a 100% U.S. company. (They also have a subsidiary in Canada.) But with 98% of revenues coming from the United States, it's about as American as Chipotle -- and entirely independent of China.  

All of the services that ServiceMaster provides are things that China cannot tax or restrict, because those services comprise primarily human labor, performed on-site in and around American homes. So long as the housing market remains strong (and CNN says that, with mortgage rates low, employment high, and wages on the upswing, 2020 should be a great year for the housing market), ServiceMaster's business should be secure. Indeed, even further out, analysts polled by S&P Global are forecasting 17% annualized sales growth for ServiceMaster, trade war or no trade war.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,279.64 (-1.12%) $-14.47
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$432.12 (1.88%) $7.97
Terminix Global Holdings, Inc. Stock Quote
Terminix Global Holdings, Inc.
TMX
$43.10 (3.73%) $1.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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