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The Trouble with Trade and Tariffs

Commentary 

To see how trade policy is creating uncertainty for investors, look no further than Cummins (CMI), the iconic American maker of diesel engines and power generators.  

Business is booming for the Indiana-based manufacturer, with sales up more than 20% in 2018 due to strong demand for heavy-duty trucks and industrial equipment.   The future looks bright, as well -- new orders for commercial trucks are surging (chart).

Nevertheless, the stock is down 16% in 2018 as investors fret over the effect of trade policy on the company.

While Cummins has facilities around the world, much of their manufacturing happens in the U.S.  Many of their component parts are made in China, and are now subject to tariffs when imported to the U.S. to be assembled. Finished products are then sold around the world where some countries are threatening to slap retaliatory tariffs on U.S. exports. Cummins also competes with companies in countries where trade policy has been more stable.

In this environment, investors have shied away from stocks like Cummins that have good fundamentals but face trade uncertainty. Many of these stocks are also reasonably valued (CMI has a price-to-earnings ratio of 11x versus 21x for the broader U.S. market).   Should trade tensions dissipate, stocks of similar companies could perform better, many of which are found in Value-style mutual funds.     

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Investment Advisory Team
Hefren-Tillotson

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