In this article, we discuss 10 American stocks that will benefit from China’s economic slowdown.
China has undoubtedly inflicted a lot of economic wounds on itself as of late, and now even the public is protesting the state of the domestic economy. Steve Tsang, director of the SOAS China Institute at the University of London, said on August 1 in an interview with Fortune that most of the Chinese public sees the “problems as driven by [the government’s] misguided policies”. Chinese President Xi Jinping is set to preside over a third term, and if he stands by his controversial policies that are damaging China’s economy and giving rise to public dissent, it could make it more difficult for Jinping to execute his vision.
China’s Slow GDP Growth
US-China relations have been strained for quite some time now, yet they remain important strategic trade partners. The United States is already facing recession threats and the latest GDP data shows economic contraction. The Chinese economic slowdown could impact the US, as well as global economies, as China is one of the world’s top exporters. Recently, China posted its Q2 GDP growth of 0.40%, below the market consensus of 1% growth. This was the worst GDP growth recorded by China since the economy shrunk 6.8% in Q1 2020 at the beginning of the COVID-19 pandemic.
China is one of the largest exporters to the US, supplying electronics and machinery, oilseeds, furniture, steel, and automotive parts and accessories. The supply chain bottlenecks and the zero-Covid policy are hurting the Chinese economy, and on top of that, real estate sales in China could decline by one-third this year. Latest reports suggest that the Chinese government is planning to pump about $44 billion into the real estate sector to give it a boost, and the credit rating agency S&P has predicted that property sales declining will be twice as bad as previous forecasts for 2022.
In light of the Chinese crisis of supply constraints, geopolitical tensions, zero-Covid measures, the property slump, and lack of economic growth, domestic American companies are set to benefit from higher demand. As tensions are also skyrocketing between Washington and Beijing amid the Taiwan crisis, exports to the US are likely to be impacted. This makes way for the machinery, agriculture, furniture, automobiles, and electrical equipment companies in the US to fill the supply gap and benefit from China’s economic slowdown. Some of the most prominent American beneficiaries of the Chinese slump could
Photo by Carl Nenzen Loven on Unsplash
include Tesla, Inc. (NASDAQ:TSLA), General Electric Company (NYSE:GE), and Deere & Company (NYSE:DE).
Our Methodology
We selected the American companies that deal in products which are largely imported by China. Amid a Chinese economic slump, these domestic firms are potentially positioned to see higher demand. We have mentioned the business fundamentals, analyst ratings, and hedge fund sentiment around these stocks to provide better context to potential investors.
American Stocks That Will Benefit from China’s Economic Slowdown
10. Calavo Growers, Inc. (NASDAQ:CVGW)
Number of Hedge Fund Holders: 12
Calavo Growers, Inc. (NASDAQ:CVGW) is a California-based company that sells avocados, tomatoes, papayas, and other perishable foods grown in California, Mexico, Peru, and Colombia to retail and foodservice customers, club stores, mass merchandisers, food distributors, and wholesalers worldwide. It operates in three segments – Fresh Products, Calavo Foods, and Renaissance Food Group. China is an exporter of fresh fruits and vegetables to the United States, and amid an economic slowdown, Calavo Growers, Inc. (NASDAQ:CVGW) is one of the American stocks positioned to benefit from the situation.
On June 3, Lake Street analyst Ben Klieve observed that Calavo Growers, Inc. (NASDAQ:CVGW)’s Q2 results outperformed market estimates on both the top and bottom line and margins reflected “real indications of sustained improvement” in a quarter that he argued “represents the clearest sign yet that the restructuring efforts are paying off”. The analyst reiterated a Buy rating and a $60 price target on Calavo Growers, Inc. (NASDAQ:CVGW) stock.
Among the hedge funds tracked by Insider Monkey, 12 funds reported owning stakes in Calavo Growers, Inc. (NASDAQ:CVGW) at the end of Q1 2022, collectively worth about $44 million, compared to 14 funds the prior quarter worth $50.4 million. Jim Simons’ Renaissance Technologies is the biggest stakeholder of the company, with 416,600 shares worth $15.18 million.
In addition to Tesla, Inc. (NASDAQ:TSLA), General Electric Company (NYSE:GE), and Deere & Company (NYSE:DE), Calavo Growers, Inc. (NASDAQ:CVGW) is one of the American stocks that will potentially benefit from China’s economic crisis.
9. United States Steel Corporation (NYSE:X)
Number of Hedge Fund Holders: 37
United States Steel Corporation (NYSE:X) is a Pennsylvania-based producer of flat-rolled and tubular steel products, selling its products in North America and Europe. The company operates through North American Flat-Rolled, Mini Mill, U. S. Steel Europe, and Tubular Products segments. The company reported a Q2 EPS of $3.86, in-line with market estimates, and its revenue for the quarter came in at $6.29 billion, outperforming Wall Street consensus by $468.84 million. China exports steel and steel products to the United States, and amid mounting tensions between the countries plus an economic slowdown, companies like United States Steel Corporation (NYSE:X) will potentially benefit as local demand increases.
On July 6, Morgan Stanley analyst Carlos De Alba maintained an Equal Weight rating on United States Steel Corporation (NYSE:X) and lowered the price target on the shares to $20 from $27. As per the analyst, steel prices have deteriorated quicker from their March peak than he anticipated and he is marking-to-market his steel and scrap price forecasts for 2022 and 2023, which also led him to cut estimates and price targets across his Americas Steel coverage.
According to Insider Monkey’s data, 37 hedge funds were bullish on United States Steel Corporation (NYSE:X) at the end of Q1 2022, with collective stakes worth $1.6 billion, compared to 39 funds in the last quarter, holding stakes in the company valued at $760.60 million. Eric W. Mandelblatt’s Soroban Capital Partners is the biggest position holder in the company, with 11.6 million shares worth roughly $441 million.
8. Williams-Sonoma, Inc. (NYSE:WSM)
Number of Hedge Fund Holders: 38
Williams-Sonoma, Inc. (NYSE:WSM) is headquartered in San Francisco, California, operating as an omni-channel specialty retailer of home products such as cookware, tools, electronics, cutlery, and furniture under the Williams Sonoma Home brand. Williams-Sonoma, Inc. (NYSE:WSM) declared on June 16 a $0.78 per share quarterly dividend, in line with previous. The dividend is distributable on August 26, to shareholders of record on July 22. As of August 4, the company delivers a dividend yield of 2.13%.
On May 27, Barclays analyst Adrienne Yih maintained an Overweight rating on Williams-Sonoma, Inc. (NYSE:WSM) and lowered the price target on the shares to $173 from $186 after the Q1 results. Williams-Sonoma, Inc. (NYSE:WSM) yet again showed the resiliency of its business, outperforming Q1 consensus and reaffirming its long-term guidance, regardless of a “brutal retail landscape and negative sentiment on slowing consumer spend”, the analyst told investors.
Among the hedge funds tracked by Insider Monkey, Select Equity Group held the largest position in Williams-Sonoma, Inc. (NYSE:WSM) at the conclusion of Q1 2022, comprising 955,342 shares worth $138.5 million. Overall, 38 hedge funds were bullish on the stock at the end of March 2022.
Here is what Voss Capital has to say about Williams-Sonoma, Inc. (NYSE:WSM) in its Q1 2022 investor letter:
“We believe shorting furniture retailers has arguably become a consensus view on the back of widely known tough comps from early 2021 (+26% and +40% SSS Comps for WSM in calendar Q1/Q2 ‘21) and fear of pull forward of demand, which seems to be corroborated by weak credit card data in the category the last few weeks and a poor outlook from furniture e-Commerce giant Wayfair, not to mention a panic-inducing, rambling conference call from the oft colorful CEO of Restoration Hardware. Lazy thematic macro analysis that stops there, however, paints an incomplete picture of what has transpired at many individual companies like WSM that have been deemed COVID beneficiaries that are now at all-time low valuations.
WSM is a furniture and home décor retailer that owns several well-known brands: William Sonoma, Pottery Barn, Rejuvenation, Mark & Graham, and most importantly, west elm. While perhaps thought of as a dying mall-based brick & mortar retailer, WSM derives the vast majority (66%+) of its revenue from e-Commerce and has been a remarkably steady performer, remaining free cash flow positive every year since at least 2007 and achieving positive same store sales comps since 2010, including +17% in 2020, +22% in 2021 with guidance for a further mid-to-high single digit growth again this year. Within the overall positive sales trends, west elm’s consistent growth has been even more impressive, with a 16% average annual same-store sales growth rate since 2012. To little fanfare, by our calculation, WSM has become the single highest quality retailer in public markets with a 58% return on invested capital (ROIC) in 2021 and a 39% ROIC on average over the past 3 years…” (Click here to see the full text)
7. Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Holders: 42
Eaton Corporation plc (NYSE:ETN) is an American-Irish multinational power management company that operates through Electrical Americas and Electrical Global segments, providing electrical components, industrial components, power distribution and assemblies, and residential electronics products. Since a huge chunk of the US exports for electronics and machinery comes from China, Eaton Corporation plc (NYSE:ETN) is one of the stocks that will benefit amid a Chinese economic slowdown.
On August 2, Eaton Corporation plc (NYSE:ETN) reported an operating cash flow in the second quarter of 2022 of $340 million and a free cash flow of $201 million. For the full year of 2022, Eaton Corporation plc (NYSE:ETN) lifted its organic growth guidance from 9%-11% to 11%-13%, compared to an estimated growth of 4.85% year over year and increased adjusted earnings per share to between $7.36 and $7.76, versus a consensus of $7.49. For the third quarter of 2022, the company expects organic growth of 13-15%, compared to an estimated growth of 6.12% Y/Y and adjusted earnings per share of between $1.95 and $2.05, versus a consensus EPS of $1.98.
Citi analyst Timothy Thein on August 4 raised the price target on Eaton Corporation plc (NYSE:ETN) to $170 from $150 and kept a Buy rating on the shares after the Q2 results. The company’s end market mix “makes it well-positioned to leverage powerful secular tailwinds,” the analyst informed investors.
According to Insider Monkey’s data, 42 hedge funds were bullish on Eaton Corporation plc (NYSE:ETN) at the end of the first quarter of 2022, compared to 43 funds in the earlier quarter. Brandon Haley’s Holocene Advisors is the leading stakeholder of the company, with 1.4 million shares worth $212.27 million.
Here is what ClearBridge Investments Sustainability Leaders Strategy has to say about Eaton Corporation plc (NYSE:ETN) in its Q4 2021 investor letter:
“We remain active in combating climate change through a large variety of holdings across several sectors, including through investing in clean energy enablers such as new position Eaton, in the industrials sector. Eaton is a market share leader in the electrical equipment industry with a broad array of products that enable the electrification of the power grid and, importantly, electrical vehicle charging infrastructure. The company’s electrical product lineup is critical to both energy saving and long-term electrification of the global economy; management has proactively moved the portfolio toward products enabling energy efficiency. The company also has a long history of actively supporting diversity and inclusion actions in all levels of the company, driven by strong commitments from senior management and an engaged and sustainability-focused board.”
6. Ford Motor Company (NYSE:F)
Number of Hedge Fund Holders: 46
Ford Motor Company (NYSE:F) is a Michigan-based automaker that manufactures and sells Ford trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. It operates through three segments – Automotive, Mobility, and Ford Credit. Ford Motor Company (NYSE:F) also manufactures automobile parts. Amid China’s economic slowdown, demand for Ford Motor Company (NYSE:F)’s auto parts is expected to rise.
On August 2, Citi analyst Itay Michaeli raised the price target on Ford Motor Company (NYSE:F) to $16 from $15 and kept a Neutral rating on the shares. The analyst updated estimates for the automaker after the Q2 results. He also concluded his “90-day Upside Catalyst Watch” on Ford Motor Company (NYSE:F) as he thinks the short-term catalysts have materialized.
Among the hedge funds tracked by Insider Monkey, 46 funds reported owning stakes in Ford Motor Company (NYSE:F) at the end of Q1 2022, compared to 53 funds in the prior quarter. D E Shaw is the leading shareholder of the company, with 31.2 million shares worth $528.3 million.
Like Tesla, Inc. (NASDAQ:TSLA), General Electric Company (NYSE:GE), and Deere & Company (NYSE:DE), smart investors are monitoring Ford Motor Company (NYSE:F) amid China’s weakening economic situation.
Here is what Baron Fund has to say about Ford Motor Company (NYSE:F) in its Q1 2022 investor letter:
“Ford (NYSE:F) is another example of typical industrial manufacturing business executive mindsets. The April 18, 2022, Bloomberg Businessweek cover story features Ford CEO Jim Farley behind the wheel of an electrified Ford F-150 Lightning. The article is titled, “Hey Elon, THIS is a truck.” I thought the article was terrific. One idea especially stood out to me. Since the F-150 is such a popular vehicle, it “argued for a gradual approach to electrification. Essentially the company retrofitted an existing F-150 with an electric powertrain rather than develop an entirely new truck.” No all-in financial and operation bet by this company on electrification.”
5. O’Reilly Automotive, Inc. (NASDAQ:ORLY)
Number of Hedge Fund Holders: 48
O’Reilly Automotive, Inc. (NASDAQ:ORLY) is a supplier of automotive aftermarket parts, tools, supplies, equipment, and related accessories in the United States. For FY22, the company expects revenue to be between $14.0 billion and $14.30 billion, in line with Street revenue estimates of $14.30 billion. Demand for US auto part manufacturers will increase once exports from China decrease on the back of an economic slowdown and supply bottlenecks, benefiting the likes of O’Reilly Automotive, Inc. (NASDAQ:ORLY).
On July 29, MKM Partners analyst David Bellinger raised the price target on O’Reilly Automotive, Inc. (NASDAQ:ORLY) to $770 from $700 and reaffirmed a Buy rating on the shares after its Q2 results and guidance. The analyst reduced his FY22 EPS estimate to $31.84 from $33.05 and FY23 estimate to $34.90 from $36.09, citing soft outlook in DIY trends, but he continues to see a “relatively solid” demand pattern for the aftermarket auto parts space with or without more price inflation.
According to Insider Monkey’s data, 48 hedge funds were long O’Reilly Automotive, Inc. (NASDAQ:ORLY) at the end of March 2022, with collective stakes worth $2.6 billion, compared to 50 funds the previous quarter worth $27.3 billion. Charles Akre’s Akre Capital Management is the leading stakeholder of the company, with 1.5 million shares worth $1 billion.
4. General Electric Company (NYSE:GE)
Number of Hedge Fund Holders: 51
General Electric Company (NYSE:GE) is an American industrial company operating in Europe, China, Asia, the Americas, the Middle East, and Africa via Power, Renewable Energy, Aviation, and Healthcare segments. As China is one of the leading exporters of industrial machinery, demand for General Electric Company (NYSE:GE)’s hi-tech equipment and machines will increase once China fails to meet supply deadlines amid a slowdown. General Electric Company (NYSE:GE) exceeded Q2 2022 EPS and revenue estimates.
Deutsche Bank analyst Nicole DeBlase on July 27 maintained a Buy recommendation on General Electric Company (NYSE:GE) but lowered the firm’s price target on the shares to $88 from $90. The analyst said he was a “bit surprised” that the stock traded up in light of the Q2 earnings report, as she expected Wall Street to focus more on the 2022/2023 free cash flow guidance cut rather than the stronger than predicted Q2 results.
According to Insider Monkey’s data, 51 hedge funds were bullish on General Electric Company (NYSE:GE) at the conclusion of Q1 2022, compared to 57 funds in the last quarter. Boykin Curry’s Eagle Capital Management is the biggest stakeholder of the company, with 13.3 million shares worth $1.2 billion.
Here is what Vulcan Value Partners has to say about General Electric Company (NYSE:GE) in its Q3 2021 investor letter:
“During the quarter, we sold our positions in General Electric Co. General Electric is a company we followed for a long time. In the past, we removed GE from the MVP list due to management’s poor capital allocation decisions which resulted in value instability. Larry Culp, the former CEO of Danaher, became CEO of General Electric in 2018. The company implemented a vast restructuring program to simplify the industrial side of its business, sold off non-core assets, paid down debt with the proceeds, and drastically shrunk GE Capital. These restructuring activities allowed its world-class jet engine and healthcare businesses to shine through, and improved value stability. As a result, we added the company back to the MVP list. While the pandemic negatively impacted General Electric’s aviation business in the short run, it also gave us the opportunity to buy General Electric in the second quarter of 2020 with a substantial margin of safety. GE is a good example of a competitively entrenched, yet slower growing MVP business. As its stock price rose rapidly over the last year, its value growth did not keep up, and the price to value gap closed quickly. As our margin of safety diminished, we sold our position in GE and allocated it to more discounted companies.”
3. RH (NYSE:RH)
Number of Hedge Fund Holders: 63
RH (NYSE:RH) is a California-based retailer of furniture and home furnishings. As China’s economy is crippled with slowing growth and supply chain challenges, demand for American retailers like RH (NYSE:RH) will be on the rise as Chinese exports to the US decline. Citi analyst Steven Zaccone said on July 1 that core investor concerns after RH (NYSE:RH)’s second guidance revision in a month are weakening business and execution risk on its strategic plans. The analyst shared the investors’ short-term concerns, but believes “a lot of damage is already priced in”. He noted that RH (NYSE:RH) now trades at nine-times his slashed fiscal 2023 earnings estimates, which he views “as the most extreme bear case” earnings case. The stock’s risk/reward “skews to significantly more upside than downside at current valuation”, said the analyst, while keeping a Buy rating on RH (NYSE:RH) with a $338 price target.
Among the hedge funds tracked by Insider Monkey, 63 funds were long RH (NYSE:RH) at the end of Q1 2022, up from 58 funds in the last quarter. Warren Buffett’s Berkshire Hathaway is the leading stakeholder of the company, with 2.17 million shares worth $707.6 million.
Here is what Polen US SMID Company Growth Fund has to say about RH (NYSE:RH) in its Q1 2022 investor letter:
“RH is a furniture store company with brand recognition and a unique business model. The company’s stock price fell sharply over the first three months of 2022 despite solid operating results, which resulted in what we believed to be an attractive opportunity to add to our position in the company. We are mindful that, on the margin, the company is certainly experiencing some early impact from record inflation and rising interest rates, and we feel comfortable in both the management team’s ability to navigate these challenges and the power of the company’s brand and its long-term potential.”
2. Deere & Company (NYSE:DE)
Number of Hedge Fund Holders: 66
Deere & Company (NYSE:DE) is an Illinois-based manufacturer of agricultural equipment, operating through Production and Precision Agriculture, Small Agriculture and Turf, Construction and Forestry, and Financial Services segments. Oppenheimer analyst Kristen Owen on July 18 reiterated an Outperform rating on Deere & Company (NYSE:DE) and lowered the firm’s price target on the stock to $365 from $419 as she revised her valuation for peak earnings. The analyst expects 2023 to represent another year of volume growth, with high-single digit pricing tailwinds and better margins as various costs improve. However, supply chain constraints persist, she told investors.
Among the hedge funds tracked by Insider Monkey, 66 funds were bullish on Deere & Company (NYSE:DE) at the end of Q1 2022, up from 61 funds in the prior quarter. Jean-Marie Eveillard’s First Eagle Investment Management is one of the leading stakeholders of the company, with 984,517 shares worth $409 million.
Here is what Harding Loevner Global Equity Fund has to say about Deere & Company (NYSE:DE) in its Q1 2022 investor letter:
“John Deere’s (NYSE:DE) newest tractor, the 8R, can operate autonomously 24 hours a day, controlled by the farmer via mobile app, with full data download of crop specifications and field analysis available via the cloud. Another example of how automation is reaching deeply into traditional manufactured products is John Deere. After 185 years in business, the iconic farming equipment maker has turned the tractor into a platform for software and service revenues. Deere’s newest model, the 8R, can operate autonomously 24 hours a day, controlled by the farmer via mobile app, with full data download of crop specifications and field analysis available via the cloud.
Revenue comes from both the initial capital outlay and monthly subscription fees. During a recent call, Deere’s CEO John May emphasized a point we hear increasingly from leading industrial companies: “The need for autonomy is here today. The demand for the solution is real. We already have customers paying for autonomy.” CFO Ryan Campbell went a step further, suggesting that growth in such digitization technologies will be the primary driver of Deere’s future margin improvements, by increasing the recurring revenues attached to each piece of equipment it sells.”
1. Tesla, Inc. (NASDAQ:TSLA)
Number of Hedge Fund Holders: 80
Tesla, Inc. (NASDAQ:TSLA)’s leading competitors in the EV sector are Chinese automakers NIO Inc. (NYSE:NIO), Li Auto Inc. (NASDAQ:LI), and XPeng Inc. (NYSE:XPEV). With a slowing Chinese economy, these competitors are less likely to cut into Tesla, Inc. (NASDAQ:TSLA)’s market share, which makes it one of the primary beneficiaries of the economic situation in China.
Morgan Stanley analyst Adam Jonas, in a note titled “Do Investors Appreciate the Tesla China Risks?”, argued that House Speaker Nancy Pelosi’s visit to Taiwan “casts the global battery race into a new light” and said that Tesla, Inc. (NASDAQ:TSLA) is “highly exposed to both the risk and the opportunity” from global EV battery dominance. Tesla, Inc. (NASDAQ:TSLA) has one of the highest exposures to the Chinese market, but its role in building-out U.S. and Western European renewable energy infrastructure is “under-appreciated”, observed the analyst, who reiterated an Overweight rating and an $1,150 price target on Tesla, Inc. (NASDAQ:TSLA) shares on August 3.
According to Insider Monkey’s Q1 data, 80 hedge funds were bullish on Tesla, Inc. (NASDAQ:TSLA) at the end of March 2022, compared to 91 funds in the prior quarter. Cathie Wood’s ARK Investment Management held a notable stake in the company, consisting of 1.6 million shares worth $1.7 billion.
Here is what GMO LLC has to say about Tesla, Inc. (NASDAQ:TSLA) in its Q1 2022 investor letter:
“To put the demand growth for clean energy materials into perspective, let’s look at Tesla (NASDAQ:TSLA). At its Battery Day last year, Tesla projected three terawatt hours of lithium-ion battery capacity needed in 2030 for the EVs and storage they expect to produce. To reach this target, Tesla alone would gobble up approximately 75% of the world’s current nickel production and four times the world’s current lithium production. These numbers are astounding enough, but when one considers that EVs currently represent just 15% of global nickel demand and about 45% of lithium demand and that Tesla will likely be producing only a small proportion of the world’s EVs in 2030, the implications are staggering. Clean energy materials companies will make a lot more money in the decades to come than they ever have both because they will be selling a lot more metric tons of material and because there are certain to be shortages where supply can’t keep up with the rapidly growing demand.”
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Disclosure: None. 10 American Stocks That Will Benefit from China’s Economic Slowdown is originally published on Insider Monkey.
