It wasn’t long ago that Apple (NASDAQ: AAPL) was the largest publicly traded company in the world. Then this happened:
The iPhone maker’s stock has lost more than a third of its market value in the last three months. And that’s largely because of the sudden and sharp decline of Apple’s Chinese operations.
CEO Tim Cook lowered the company’s Q1 guidance in a January 2nd warning letter to investors, hinting that Apple would badly miss expectations due to weak sales in China. The Middle Kingdom has started to feel the impact of the trade war — and it has stopped buying phones like it used to.
Cook is probably not the last American CEO who will have to write an ominous letter to investors about underperformance in China. As White House Council of Economic Advisors Chairman Kevin Hassett said in late December:
It’s not going to be just Apple… There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China.
Indeed, there are lots of companies — and even entire industries — that draw a significant portion of their sales from China. Let’s identify some of these China-vulnerable stocks before they crater like Apple.
Semiconductor Manufacturers
No industry has more sales exposure to China than semiconductor manufacturing. In fact, several of America’s largest chipmakers draw the majority of their revenues from China.
That’s because most American-made semiconductors ultimately end up getting soldered into a Chinese-made phone or computer.
Qualcomm (NASDAQ: QCOM) is unfortunately a great example of this reliance on China. The San Diego-based chipmaker draws a whopping 65.4% of its revenues from China. That’s more than $14.5 billion a year — just from China.
Its similarly named rival Broadcom (NASDAQ: AVGO) isn’t in a much better situation. It draws 53.7% of its revenues from China, or $9.4 billion a year.
The two stocks have held mostly flat in the last three months. Qualcomm (blue line) has lost a bit of value; Broadcom (orange line) has gained a bit.
That could change when the two companies release their next quarterly earnings reports on January 30th and March 21st, respectively.
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Hotels & Resorts
Foreigners made up almost 10% of all U.S. hotel guests in 2016, the latest year for which data is available. If you look at key hotel markets like New York City, San Francisco, and Miami, that proportion climbs to almost 50%.
And a growing share of international visitors to the U.S. comes from China, the world’s fourth-largest source of tourists. If the current trade disagreements escalate into travel restrictions — or if many Chinese people voluntarily stop visiting the U.S. for patriotic reasons — it could take a bite out of many hotels’ books.
What’s more, many American hotel chains have substantial operations in China. Wynn Resorts (NASDAQ: WYNN) earns 64% of its revenues in China. And Marriott (NASDAQ: MAR) records China as its second-largest market.
Like the semiconductor stocks discussed above, Wynn (blue line) and Marriott (orange line) have been more or less flat for the last three months.
They probably won’t stay flat after Wynn reports earnings on January 28th or after Marriott reports earnings on February 13th.
The Takeaway: We’re Not Saying “Dump These Stocks”
At this point, I should reiterate something that Jason Stutman and Briton Ryle have written about here and here, respectively: Lots of companies’ Chinese operations are in a bad spot right now. But that doesn’t mean the stocks are headed to zero. In fact, some of them could get cheap enough to reach attractive buy points.
Many of the companies we’ve discussed here, like Qualcomm and Marriott, are more than strong enough to survive a few ugly sales misses. In fact, this China downturn could be exactly what they need to get their valuations out of the clouds and down to more reasonable levels.
Our thesis here is not “dump these stocks and never look back.” It’s just “be wary of adding to your holdings of these stocks right now.”
Hopefully, in a few months’ time, we’ll be revisiting some of these stocks as great value buys.
Until next time,
Samuel Taube
Wealth Daily
