Think Small As Trump Slaps Tariffs On Mexico! 5 Solid Buys

Wall Street takes a beating as President Trump turns tariff guns on all Mexican imports, to build pressure on the country to crack down on the surge of illegal immigrants trying to cross the U.S. border. This move aggravated trade war concerns among investors, thanks to China’s threat to curb supply of rare-earth minerals to the United States.

However, small-capitalization stocks remain fairly immune to trade issues. These stocks have high domestic exposure in terms of revenue generation, which shields them from international disputes. Thus, investing in sound small-caps seems sensible at the moment.

Trump Opens New Front in His Trade War

In a rather surprising move, Trump announced in a tweet that his administration would impose new tariffs against all products imported from Mexico, a move that spooked Wall Street and hit the Mexican peso. He categorically mentioned that such tariffs will stay in effect until the illegal immigration problem is sorted.

Trump tweeted that “on June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP.” He added that the “tariff will gradually increase until the Illegal Immigration problem is remedied at which time the Tariffs will be removed.”

If the illegal immigration crisis persists, Trump said that tariffs will be hiked to 10% on Jul 1, and by another 5% every consecutive month, up to 25% by Oct. 1. Trump said that “tariffs will permanently remain at the 25 percent level unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory.”

However, the economic implications on both the sides won’t be good. After all, Mexico is the third-largest trade partner of the United States, with $346.5 billion of goods imported from Mexico last year. And how can we forget that tariffs are more or less import penalties on U.S. companies, and eventually such companies will raise prices for consumers.

Trump’s plan to impose tariffs on Mexico, in fact, violated the recently-negotiated USMCA. But we all know that USMCA was one of his top legislative priorities. What’s more baffling is that the President’s threat came at a time when Vice President Pence was promoting the USMCA in Canada and U.S. Trade Representative Robert Lighthizer was starting a process to move the deal through the U.S. Congress. Nonetheless, Mexico’s president Andrés Manual López Obrador said he’s not willing to get into any confrontation and that social problems cannot be resolved by taxes.

U.S.-China Trade War Heats Up

Bewildered investors, by the way, are already dealing with negative news out of U.S.-China trade negotiations. Beijing is ready to use rare-earth minerals, including 17 chemical elements used in almost everything from mobile phones, computer memory chips and rechargeable batteries to military equipment.

Adding to the worries, China’s Huawei Technologies is thinking of filing a lawsuit against the Trump administration in its latest effort to fight sanctions from Washington. The White House has added Huawei to its Entity List that includes companies that American firms can’t sell technology without obtaining a license from the U.S. government. Following this, chip bigwigs like Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM) Corp and Broadcom (NASDAQ:AVGO) Inc, to name a few, have restricted supply of major software and hardware components to Huawei.

Kim Forrest, chief investment officer at Bokeh Capital Partners, summed up by saying that “earlier in the year we thought the U.S.-China agreement was close to being done, and now it looks more far away than ever and that is making investors worried.”

Trade War Escalates! Invest In Domestic Producers

As possibilities of a prolonged trade war loom large, there are a few companies that might benefit from rising trade tensions. Among such companies are domestic producers of goods. Due to their limited international exposure, they offer higher protection than their large- and mid-cap counterparts against any economic upheaval. These stocks also have solid growth narratives as their promising outlook remains unfazed by the change in tariffs.

We have, thus, selected five such stocks that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Barrett Business Services, Inc. (NASDAQ:BBSI) provides business management solutions for small and mid-sized companies in the United States. The company has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings has increased 1.7% over the past 60 days. The company’s expected earnings growth rate for the current year is 10.4% against the Original post

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Written By: Zacks Investment Research