The U.S stock markets are being absolutely pummeled today as the trade tussle between the Trump and Xi administrations escalates. Against this backdrop it is imperative for investors to focus on the names that are not working as harbingers for further downside. Yes, Microsoft, Apple and Amazon are all down at least 2.5% in today’s trading, but anyone who bought any of those tech titans on August 5, 2018, still has a nice unrealized capital gain.
It is in the names that are hitting new 52-week lows that we can see the seeds of panic. Contagion is a real thing in markets, and the drop in China's renminbi versus the dollar has destroyed trillions of dollars in global equity market capitalization today. Just as importantly, declines in particular sectors and bellwether stocks in those sectors can cause contagion in equity markets. This is especially true for the U.S. market, which has been soaring on a steady diet of moonbeams, fairy tales and Fed dovishness for the past 3 years.
So, here are pairs of names that have hit new 52-week lows today, and my read-through on the outlook for the macro—global economies—from those micro situations.
Fluor/McDermott. Fluor shares are not just trading at a 52-week low today, they are at a 16-year low after last week's shock loss report. I made hefty profits in 2006 and 2007 trading options of Fluor, as engineering and construction (E&C) companies, like Fluor, Foster Wheeler (now part of privately-held Wood Group) and others benefited from the build-out of what is today modern China. It's not as if a weaker RMB means that those projects are now being torn down, but clearly the incremental buyers, especially in China and especially in the energy sector, are just not there anymore. McDermott also reported a surprise loss last week, and its shares not only hit a new 15-year low today, but, as with Fluor, are also trading below their 2004 levels. These are not idiosyncratic issues. The E&C industry is being destroyed by lack of Chinese demand.
ConocoPhillips/Halliburton. Lack of Chinese demand has hammered FLR and MDR, but it is fear of a slowdown in Chinese demand that has sent ConocoPhillips and Halliburton to new one-year lows today. The most recent data from the Chinese government showed a solid 15.2% year-on-year increase in Chinese oil imports in June, but stocks are forward-looking discounting mechanisms, so the future is always more important than the past. The stock market is telling you that a slowing local economy will hamper Chinese imports of crude. Against that backdrop, as I noted in this Forbes article, all but the biggest and most globally-integrated energy stocks are simply radioactive.
Genuine Parts/Goodyear. These are among the first companies I followed when I entered Wall Street equity research in 1992. So, I have a little insight, and the fact that both hit new 52-week lows today, frankly, scares the hell out of me in regard to the overall market. Genuine’s largest business, NAPA, and Goodyear’’s largest end market, US replacement tires, are geared toward repair-and-replace demand, not the sales of new cars. They are steady businesses, and I have enjoyed owning GPC shares for the past 20 years. It’s way too late in the cycle to buy GM, Ford or even Tesla, but when the aftermarket names start declining, the market is pricing in deep recession, not just a soft landing.
Baidu/SINA. China is radioactive. That much is true. The real issue with Chinese Web stocks like Baidu and SINA isn’t that they are out of favor among portfolio managers, it is that the lack of fundamental soundness—negative cash flows and accounting opacity—means there is no limit to how far these stocks could fall. I don’t own Apple and Microsoft here, but I know that there is a level at which these companies’ cash hoards will make them too cheap not to own, i.e. a support level. Chinese stocks have no such support. Avoid them.
Bed Bath & Beyond/Macy's. Retailers are now being hit by threats of tariffs on consumer products, as the first few rounds of tariffs really focused on capital goods. Amazon has been killing these companies for the past decade, and trade tensions are only the incremental straw on the camel’s back. Do not bottom fish in retail. No P/E ratio is cheap enough to invest in an industry that is shrinking, not growing.