A Stock to Avoid During the Trade War Mess
The U.S./China trade drama has dragged on seemingly forever. For good reason, agricultural and tech companies have frequently fallen under the microscope as stocks most vulnerable to the continuing tensions. However, there’s another stock that hasn’t gotten a lot of attention but it, too, could become a casualty of the trade war.
You probably guessed from the picture that the company is Tiffany & Co. (NYSE: TIF), commonly known as Tiffany’s.
So why do I think one of America’s most beloved retail institutions should be avoided as an investment, at least for now?
Let’s Start With the Good
Before we get to reasons to be concerned, let’s remember that there are things to like about Tiffany’s.
There’s no doubt Tiffany’s brand shines brighter than any other in the precious jewelry industry. The name is globally recognized. It stands for luxury and elegance.
Unusual for the industry, Tiffany’s controls its own production and distribution. As a result, it has direct say over quality, which helps to protect its image.
Tiffany’s benefits from an increase in the number of wealthy persons in the world and an expanding middle class, especially in emerging markets like China. The Asia-Pacific region now accounts for about 28% of revenue. In 2014, that percentage was 23%. It’s estimated that Chinese consumers account for about a third of the global luxury market.
Now the Not So Good
Tiffany’s revenues in the Americas (almost all of which are U.S. sales) have fluctuated year to year, but last year’s revenue was about where it was in 2014, so there hasn’t been much growth at home. The company relies on Asia, and more specifically, China, for growth.
Moreover, Chinese tourists inflate U.S. sales by buying Tiffany’s products while visiting. They do this to avoid paying China’s high luxury and import taxes. Another way Chinese citizens avoid those taxes is through a practice called daigou. They would ask friends or family living in the U.S. to buy luxury goods in the U.S. on their behalf and ship them to China.
Overall, tourists account for “low double-digit percentage” (teens) of total U.S. sales for Tiffany’s. But in the latest quarter, Tiffany’s reported that sales to tourists fell by 25%, “even sharper” to Chinese tourists.
How Far Will Things Go?
Back in January, the U.S. had warned its citizens that if they go to China, the Chinese government may detain them.
Now, China is doing the same thing. Its Ministry of Foreign Affairs recently issued a safety warning against travel to the U.S. It claims that Chinese citizens have been subject to harassment by U.S. law enforcement and warns of the frequent occurrence of crimes in the U.S.
Beijing knows that Chinese tourists spend a lot of money in the U.S., so discouraging travel to the U.S. is clearly a tactic to try to keep that money out of the U.S. economy.
China has also actively cracked down on daigou to try to keep luxury consumption domestic. Both countries have raised tariffs on precious jewelry coming from the other country. If the trade war continues to escalate, there’s no telling how far restrictions will go.
The longer the trade war drags on and the more the two countries try to hurt each other, the riskier Tiffany’s looks.
Even after a big drop from its July 2018 peak, Tiffany’s stock still trades at a forward price-to-earnings ratio of 19x for 2019 and 18x for 2020. Given the high uncertainties surrounding the trade war, I think it’s best to avoid TIF for the time being.
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