There’s no end sight to the tariff war. Worse, the threat of new tariffs seems to be permanently lurking the in the background. Autos from Europe are on notice. And who knows what histrionics may erupt with the U.S.-Mexico-Canada Agreement as it lurches toward passage?
Finding stocks insulated from tariffs is not the easy task it first appears. For instance, casual dining restaurants cater to domestic consumers, right? But according to Nation’s Restaurant News, about 43% of fruits and vegetables come from Mexico. Apparel is sold here, but made there. Even utilities are tricky because solar power depends on panel made in China.
If you are looking for stocks detached from tariff volatility, think about software companies, hospital groups, REITs that own, but don’t build properties and regional banks. And even banks can be tricky. One I talked to in South Caroline had the VW, BMW and the Port of Charleston within its footprint.
Here’s three companies that have merit in “normal times” but even more amid never ending trade wars.
REITs are exposed if they are active builders and rely on materials that come from across the globe. But some REITs just hold properties portfolio style.
One of these is Store Capital which owns single single tenant properties in off the beaten track categories like schools, health clubs, movies and farm suppliers.
Tariffs or no, Store gives investors diversification and plenty of it. The company has more than 2,300 properties in all 50 states. Retailing accounts for about 64% of rents while service and manufacturing account for the balance.
This kind of diversification may be what attracted legendary investor Warren Buffett who owns 8% of Store. He probably likes that Store is a cash machine too. Since 2013, Store has increased funds from operations (FFO) from $55 million to $358 million last year, for compound annual growth of more than 45%. Over the same period, dividends have grown from $0.87 to $1.28 or about 8% annually, lower than FFO growth owing to aggressive property acquisition.
Investors who like Store Capital, and there’s lots of them, say the company can’t be “Amazoned”. Car washes, auto and RV dealers, movie theaters and schools are, for now, outside the prehensile reach of Amazon, and happily, tariffs too.
Crown Castle International
So-called 5G communications networks are emerging and the companies that manage the cell towers it relies upon are the focus of intense investor speculation. The primary competitors are American Tower and Crown Castle International. Though the names suggest otherwise, American Tower is global while Crown Castle’s 40,000 towers are located here in the United States make it the play for tariff avoidance.
There is some question whether the metals and miles of fiber cable that go into building and maintaining a cell tower network are indeed insulated from tariffs. The good news is even if they aren’t, a look at the 2018 10-k shows the approximately $1.6 billion in capital expenditures for towers for 2018 is just under 5% of the company’s total assets. Therefore if there is some exposure to tariffs, it’s limited.
The only thing better than operating in an exploding market is an exploding market with financially strong customers. In the case of Crown Castle, the bulk of its revenues come from the likes of AT&T and Verizon which all carry investment grade ratings, a good proxy to assess the their ability to pay long term lease contracts. The downside here however is the concentration risk in Crown Castle’s revenues.
Worth noting is Crown Castle’s admirable track record returning cash to shareholders. In 2014, shareholder dividends were $1.87 and grew to $4.28 in 2018, for an average annual growth rate of 23%, and this is before the long term and disruptive driver that 5G is likely to be exerts its influence.
Intuit offers the best of both worlds when it comes to tariff protection. Just 5% of its revenues come from overseas, and its primary raw material, code, is immune from any punishment the Chinese might decide to visit upon our exports.
But Intuit is an established leader in fintech offering a wide range of solutions for individual consumers, accounting professionals, businesses and financial institutions. You may not know the name Intuit, but you probably know its products: TurboTax, QuickBooks and Quicken.
Intuit shares have been on a tear lately. From a recent low of $185 the stock is now is trading at about $266, off the August high of about $288. While this rise may give pause, long term investors should bear in mind the opportunities in fintech, and Intuit’s established position within it. Intuit is no start-up and spends $1.2 billion annually on R&D.
To understand how this commitment to R&D can play out, consider how Intuit’s popular TurboTax platform has been bulked up with TurboTax Live. This new feature lets users access a tax professional live as they prepare their taxes using TurboTax software. The utility of this means that Intuit is now taking aim at the tax preparer assisted services market which has annual spend of $20 billion, and there’s not a tariff in the world that can touch that market.