8 Stocks I’m Buying As A Resurgent Trade War Looms

Another packed article this week. All meat, no potatoes. No time for appetizers. Let’s dig in to a feast of economic data, then cleanse our palate with some stock picks.

Here’s what’s on the menu:

• More signs that the economy is bending toward recession
• Why you shouldn’t invest based on politics
• Why the likely resurgent trade war is bad news for the economy
• My buy list, with some emphasis on why I like REITs so much right now and why one REIT in particular recently came onto my buy list.

Bon appétit!

More Evidence of Economic Weakening

I’ve been making the case for a while now that the US is in the late stage of its economic cycle. We have not achieved that fabled “soft landing.” Recession hasn’t been avoided, just delayed by unusual and unprecedented circumstances.

In 2020-2021, the US experienced the fastest growth in the money supply in its history. It takes a long time for that much new money to work through the system and for the ripple effects to die down.

At this point, I believe most of the ripple effects have played out, and the US economy is settling back into the low-growth, low-inflation state that characterized it before the pandemic.

In the near-term, I think a recession still looks likely, although perhaps not assured.

Many folks would be caught off guard by a recession, if one does come, because they are overly focused on stock prices as a signal of economic strength. But stock prices, especially as measured by market cap-weighted indices, are not necessarily a good indication of broad-based economic strength.

There’s a huge divergence right now between the strong stock market and weak Fed regional manufacturing surveys:

Such divergences usually don’t last long. The question is, are stocks leading manufacturing, or will weak manufacturing eventually pull down stock prices? Or some combination of the two?

Last week, in “9 Stocks I’m Buying As Consumer Spending Stalls,” I showed some evidence that consumer spending is losing steam. But the labor market is also losing steam, perhaps faster than people think.

Here’s LinkUp’s daily job openings number for the 10,000 largest US companies:

As you can see, it has fallen quite a bit over the last year, but it has absolutely plunged over the last month in particular. This corroborates the Bureau of Labor Statistics’ JOLTs data showing total nonfarm job openings collapsing over the last few months.

Granted, there are still ~8 million job openings, according to the BLS. But keep in mind that job openings never go to zero. The trough in job openings during the pandemic was about the same level as the peak in openings in 2007 before the GFC.

Who knows what the trough in job openings will be this time around, but the point is that the absolute level matters less than the trend.

An optimistic take would be that the trend is simply toward normalization.

I disagree. The economy moves in cycles. It doesn’t have a baseline or equilibrium into which the economy settles after disruptions. Recessions are a normal part of the cycle.

My base case continues to be that a relatively mild, early 2000s-style recession is coming at some point, but who knows. My crystal ball is in the shop.

Don’t Invest Based On Politics

As I write this on Thursday, June 27th, both major US presidential candidates are preparing for the first presidential debate of this election cycle.

While every presidential election takes on a character of its own, one of the peculiarities of this election is the preponderance of a brand-new term: “double-haters.” That is, voters who hate both of these historically unpopular candidates.

Polling suggests that the race is dead-even and that these double-haters will play a decisive role.

For now, I think there are at least two takeaways for investors:

1. We may see increased volatility this Fall as the horse race drama heats up, and
2. The stock market’s reaction to whoever wins will be logical, but may not be what most people expect.

In 2016, the consensus seemed to be that the market would crash if the dark horse Donald Trump won, and yet, fueled by sudden optimism about tax cuts, the S&P 500 (SP500), Dow Jones Industrial Average (DIA), and Nasdaq Index as represented by Invesco QQQ Trust ETF (QQQ) soared after the election:

Of course, things started to get cattywampus in 2018 because after the tax cuts of 2017 came the tax (tariff) increases of 2018-2019, which, along with Fed tightening policy on “autopilot,” the market didn’t particularly care for.

What about 2020? A popular narrative back then, unsurprisingly endorsed by Trump himself, was that if Biden got elected, the market would crash. Say goodbye to those tax cuts if Biden gets in the White House!

And yet, partially because of the rapid discovery of effective COVID vaccines allowing the economy to recover faster, stocks absolutely ripped during Biden’s first year in office:

As you can see above, green energy stocks such as those in the iShares Global Clean Energy ETF (ICLN) and Invesco Solar ETF (TAN) also enjoyed a brief and bubbly bout of euphoria after Biden’s ascent.

If you owned these ETFs before Biden got elected, then you got a nice opportunity to realize some gains in early 2021. But if you bought in during the euphoria, you’re more likely to have taken a loss than a gain.

It’s as if the market woke up one morning and thought, “You know what? I don’t think Biden’s subsidies are going to make green energy that much more profitable.”

Something similar is true for the oil & gas stocks in the energy sector (XLE). Though Republican presidents raise investor sentiment for energy stocks, “drill baby drill” isn’t necessarily a formula for higher energy sector profits. More production often coincides with lower prices, which means lower profit margins for the oil companies.

Less US production, or less growth of production, as would typically be seen during a Democratic administration, tends to lead to higher oil prices and energy sector profits.

Even though the energy sector briefly rallied over 10% in the month after Trump’s election in 2016, the simple fact of the matter is that energy stocks have performed far better during Biden’s term than they did during Trump’s — even omitting the anomalous COVID-19 period.

Again, there’s a logic to this, but it’s not necessarily what most people would expect.

Don’t invest based on politics. The market often pulls some sleight of hand on you when you do.

The Trade War Ramps Up Again

A few months ago, in “7 Stocks I’m Buying The First Week of May,” I wrote about how rising trade barriers are acting as a headwind to economic growth.

Contrary to the common misconception, trade wars are bad for most workers as well as businesses and consumers. International trade has been tremendously beneficial to the US economy as well as the economies of our trading partners.

There’s almost no debate about this in the field of economics.

If you don’t believe me, I commend to you the above-linked article. In that article, I explain how:

• Trade barriers with China have scarcely led to the reshoring of manufacturing back to the US, except in highly subsidized industries like semiconductors and green tech.
• Instead, the trade war with China has mostly spurred a shift toward importing from other Asian and Central American countries.
• Many US jobs are created from international trade. When accounting for non-manufacturing jobs, trade with China (and international trade in general) has had a net positive effect on US employment overall.
• Research demonstrates that the 2018 tariffs had little to no positive effect on American manufacturing employment and a negative effect on overall employment. One study posited that US job losses as a result of the 2018 tariffs on China (and resulting counter-tariffs) amounted to about 250,000.
• Goods most exposed to international trade have enjoyed the most deflation (lower prices!) over the past few decades.
• Recent research shows that a 2-point across-the-board reduction in tariff rates would save the average American household $800 per year.
• The high-cost, high-tech, highly automated factories being built in the US today are employing far fewer and higher-skilled workers than the labor-intensive factories built in the 20th century.

Trade wars may be politically popular, but the evidence overwhelmingly shows that they are economically destructive.

That makes it dismaying to see both US presidential candidates pushing increasingly protectionist trade policies.

President Biden not only maintained the vast majority of Trump’s tariffs, he also added some new ones this year. The Tax Foundation estimates that the Trump-Biden tariffs reduce real GDP by 0.2 points, eliminate 142,000 full-time US jobs, and cost US households an additional $625 per year.

Perhaps the biggest misconception about trade wars is that foreign importers have to simply eat the costs of the tariffs. That isn’t how it works. Ultimately, US businesses and consumers pay for the tariffs.

Meanwhile, former President Trump has proposed a 10% across-the-board tariff on all imports, regardless of origin. The Tax Foundation estimates that, if implemented, this tax on imports would reduce real GDP by 0.8 points and destroy about 684,000 full-time US jobs.

Research from multiple think tanks (from across the political spectrum) also estimate that this 10% all-imports tariff would cost the average US household between $1,500 and $1,700 per year. The Tax Foundation puts the cost at more like $4,100 per household, but much of that would be borne by US businesses and a small portion would be borne by the foreign importer.

And this doesn’t even account for the retaliatory tariffs that would likely follow.

That’s precisely what happened in 2018-2019. As the US raised new tariff walls, China imposed tariffs on imports from the US right back.

The net effect of this trade war has been unequivocally negative, costing Americans dearly for every US manufacturing job protected from foreign competition.

Likewise, multiple economic studies suggest that a 10% across-the-board tariff would be overwhelmingly net negative for the US economy. They would do very little to increase the competitiveness of US producers, and would instead raise costs for US consumers and businesses.

The word for rising costs for consumers and businesses is… you guessed it… inflation.

If Trump has his way and also raises tariffs on all Chinese imports to 60%, the economic damage will compound greatly.

Lest you think me biased and letting Biden off easy, I’ll note that Biden’s recent tariff increases are also effectively a tax on US consumers and businesses.

Trump’s primary misconception about tariffs appears to be that foreign importers bear the full burden of the tax, while Biden’s primary misconception appears to be that these “strategic” tariffs will nurture and grow American production in protected industries.

Lots and lots of evidence suggests that government subsidies, not tariffs, can actually increase US manufacturing in certain sectors. The US Semiconductor Industry Association has made this argument themselves.

Subsidies attract domestic and foreign investment in manufacturing, while tariffs discourage foreign investment and do little to nothing to spur domestic investment.

I’m not here to talk politics. I’m just pointing out that there are some bad economic ideas making a resurgence in the political sphere.

Friday Morning Post-Script

Still not here to talk politics, but after the Thursday night presidential debate… well, let’s just say Trump’s odds of winning rose while Biden’s fell.

More than ever, I think investors will be thinking about whether and how much their holdings are exposed to a likely escalation in the trade war.

From October 2023 to April 2024, as Trump’s odds of winning the election have risen, so, too, have stocks with greater exposure to US-based suppliers rather than Chinese ones.

As for my own portfolio, I am thinking about my largest holding of Agree Realty (ADC), a net lease REIT that owns high-quality retail properties. Many of these retailers, especially discount and dollar stores, have significant exposure to Chinese suppliers. Virtually all of them have significant exposure to other international suppliers.

Of course, these national retailers have purchasing offices all over the world and have the ability to switch from Chinese to Indian or Malaysian or Mexican suppliers.

But if there’s a 10% tariff on all imports, there’s nowhere to hide.

Can Walmart (WMT) still guarantee “everyday low prices” with a 10% tax on a huge portion of its goods? Can dollar stores like Dollar General (DG) and Dollar Tree (DLTR) make their ultra-low-price business models work with that much disruption to their cost of goods?

My Buy List Going Into July

Why do I keep buying real estate investment trusts (“REITs”) despite their enduring underperformance?

The primary reason is that REITs’ dividend profiles (yield + estimated future growth) are among the most attractive across the entire market. My investing goal is to generate the largest and fastest growing passive income stream possible. REITs are highly suited toward achieving that goal, in my view.

But another reason is that I’m a natural contrarian. Whenever I hear a strongly expressed opinion, even if I agree with it, my brain naturally plays devil’s advocate, bringing up counterarguments.

The market hates REITs right now. Most investors treat them as bond alternatives, and fund managers are more underweight REITs than any other part of the market:

Moreover, the average REIT is trading at around a 15% discount to its net asset value (market value of assets minus debt).

So, let me turn the question around: If you’re a value investor, why aren’t you looking for good deals in the REIT space?

Without further ado, here’s where the buy list stands today:

	Dividend Yield	Projected Forward Dividend Growth Rate (Guesstimate)
American Tower (AMT)	3.3%	High-Single-Digit
Brookfield Asset Management (BAM)	4.0%	Low-Double-Digit
Cullen/Frost Bankers (CFR)	3.6%	Mid- to High-Single-Digit
Comcast (CMCSA)	3.2%	High-Single-Digit
CareTrust REIT (CTRE)	4.7%	Mid-Single-Digit
InvenTrust Properties (IVT)	3.7%	Mid- to High-Single-Digit
Rexford Industrial (REXR)	3.8%	High-Single-Digit to Low-Double-Digit
Sempra (SRE)	3.3%	Mid- to High-Single-Digit

Click to enlarge

There’s one newcomer on this list, CareTrust REIT, that I’ll highlight below.

I had wanted to explore a little more deeply why I like Comcast despite its heavy exposure to the slowly (or maybe not-so-slowly) dying industry of cable TV, but that will have to wait for next time. I’d like to spend more space on CareTrust REIT this week.

But first, a brief point on Sunbelt apartments.

Sunbelt Apartment Absorption Remains Ultra-Strong

The lion’s share of multifamily construction has been concentrated in Sunbelt cities, where net migration has been strongest since COVID-19.

That’s why coastal apartment REITs like Essex Property Trust (ESS) and AvalonBay Communities (AVB) have significantly outperformed Sunbelt apartment REITs like Camden Property Trust (CPT) and Mid-America Apartment Communities (MAA):

Renter demand growth may be slower in coastal markets, but supply growth is also minimal to nonexistent.

Touché, costal apartment REITs.

But I remain preferential toward Sunbelt markets for the long run, which is why MAA is a large holding in my portfolio.

There are supply headwinds this year and going into next year, but I’m betting that long-term bottom-line growth will be better for Sunbelt landlords. Demand remains far stronger in most Sunbelt markets than on the coasts.

Take, for example, the most oversupplied multifamily market in the nation of Austin, TX. You’d think that with such a huge supply pipeline, it would take years for renters to absorb all these new units. And yet, apartment absorption in just the first half of this year has already surpassed the entire year of 2023 and is on track to be the second-highest annual level in the city’s history.

According to CoStar, Austin absorption should remain at historically high levels in 2025 and 2026 as well.

I’d bet that many other Sunbelt markets can tell a similar story as Austin.

Supply headwinds will pinch MAA (and CPT) this year, but I think the recovery will be much faster than many investors think. And meanwhile, MAA has the cost of capital and balance sheet strength to pounce on any opportunistic acquisitions or development projects that come its way.

Why CareTrust REIT Is My Top Pick In Senior Housing

CTRE is a REIT focused on real estate in the senior housing and care space. It owns 291 properties and has a little less than $4 billion in enterprise value. The REIT’s primary focus is on skilled nursing facilities / nursing homes (~70% of the portfolio), but it also has growing exposure to senior housing and multiservice campuses (~30%).

While there was a lot of talk about the coming “silver tsunami” of seniors in the 2010s, the population of the 85+ age group barely grew during that decade. In the 2020s and beyond, however, the growth in this population is expected to explode.

At the same time, while the supply of senior housing real estate surged in the 2010s anticipating the coming silver tsunami, it has since collapsed in the face of COVID challenges and high development costs.

This supply demand balance is arguably even more pronounced for skilled nursing / nursing homes, which saw a huge wave of closures over the course of the pandemic.

Even with this strong backdrop, operating senior housing is a tough and low-margin business. But CTRE’s portfolio is 100% net leased, meaning that it has zero direct exposure to operational or property costs. That may limit its upside during the good times, but it greatly limits its downside during the bad times.

Also notable is that CTRE focuses on facilities that provide high (or at lease above-average) quality care.

It’s tougher to maintain quality and strong rent coverage in facilities that provide low-quality care.

Moreover, while CTRE’s credit rating is sub-investment grade at BB+, its balance sheet is undeniably the strongest in its peer group. CTRE has no debt maturities until 2026, and its net debt to EBITDA of 0.6x is well below both its historical average and all of its peers’ leverage.

A critic might say that CTRE is underleveraged and not optimizing shareholder returns. But the truth is that CTRE has been using its strong cost of equity to reset its balance sheet and create massive capacity for accretive portfolio expansion.

And when it becomes optimal to increase leverage, management will do so. Their target leverage ratio is around 4x EBITDA, in line with the blue-chip leader in this space, Welltower (WELL).

WELL may have greater exposure to the operational rebound in senior housing through its SHOP exposure, but CTRE has greater capacity for needle-moving external growth via portfolio expansion.

As another example of CTRE’s strength and resilience, note that it is the only REIT in the senior space that has continued to grow its dividend through COVID-19. In fact, over the last 5 years, CTRE’s dividend has increased almost the same amount as WELL’s dividend has decreased.

This chart, I believe, highlights the resilience of CTRE’s high-quality, net leased portfolio as well as the conservatism of its financial management.

Quality wins eventually.

Hence, why CTRE’s total returns since its IPO have trounced those of its senior housing peers as well as the broader REIT index.

CTRE’s senior management, namely CEO Dave Sedgwick, came into their roles at CTRE from a senior housing operating background. They know the pitfalls to avoid and what quality measures to look for.

They’ve done a phenomenal job of growing bottom-line cash flow, dividends, and shareholder value, and I believe the best is yet to come.