The U.S. and China just delivered exciting news to investors. The two countries halted escalating trade tensions and brought import tariffs down from astronomical levels to manageable ones. Since import tariffs are paid by the importer, an excessively high rate could hurt the consumers and companies that buy products from abroad. That concern weighed on investors’ minds — and on the stock market in recent weeks.
But after the U.S. and China reached an initial agreement, one in place for 90 days as the countries negotiate a final deal, the three major benchmarks rallied. The index to post the biggest gain was the Nasdaq Composite as investors applauded the better environment ahead for technology companies — players that import heavily and generally excel during strong economic times.
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The news is positive for this entire industry, but I predict one stock in particular will be the biggest winner of the deal. Let’s check out this tech powerhouse that also happens to be a bargain buy right now.
Image source: Getty Images.
The U.S.-China trade agreement
First, a quick note on the details of the agreement between the U.S. and China. Originally, both countries had imposed tariffs of more than 100% on each other, but following the talks, they settled on a level of 10%. And to that, the U.S. added 20% linked to President Donald Trump’s earlier plan to apply tariffs to countries he says are involved in the entry of lethal drugs into the U.S. So, China now faces import tariffs of 30%, significantly lower than the 50% or higher some strategists expected.
The countries put this agreement into place for 90 days and will continue discussions in the meantime.
As I mentioned, above, this is positive news for tech players and even companies across industries, considering the broad variety of products that originate in China. But one company in particular could see the biggest boost of all from this news, and that’s Apple (NASDAQ: AAPL). The tech giant, maker of the iPhone as well as other products such as Macs and iPads, manufactures heavily abroad — and China has been central to this international production network.
In fact, 90% of all iPhones are made in China, and the iPhone made up about half of Apple’s total net sales in the most recent quarter. So, the idea of a heavy tariff on imports from China was exceptionally bad news for Apple. Of course, the company didn’t sit by without taking action. In the latest earnings call, earlier this month, Apple said it was in the process of shifting production for U.S. iPhones and other products to India and Vietnam.
Removing a big risk from the scene
After the U.S.-China agreement, it’s not immediately clear if Apple will continue with those plans. But in any case, the new tariff level clearly removes a big risk to earnings from the scene, and that’s already lifted investor sentiment about the stock. It climbed more than 7% in the trading session following the announcement.
Tariffs at a more manageable level mean Apple won’t have to rush to transform its entire supply chain to avoid disastrous impact on earnings. It’s also important to note that, so far, import tariffs haven’t applied to electronics, greatly minimizing the immediate impact on Apple. But Trump has said he plans on unveiling a tariff level specifically for these products.
Considering the president’s initial exemption of electronics from the steepest of tariffs, there’s reason to be optimistic about the creation of a manageable duty for these products.
All of this news is positive because it means Apple won’t face an enormous level of tariff pressure on earnings, and this could offer investors a good reason to get in on shares of this tech giant, especially at the current level. The shares trade for 29 times forward earnings estimates, down from more than 35 times just a few months ago.
And that’s why I predict that Apple will be the biggest winner of the U.S.-China tariff agreement — from an earnings and a share performance perspective.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
