Money Trade war has these two companies trading at big discounts

22:27  12 july  2018
22:27  12 july  2018 Source:   fool.com

US tech stocks rise; Amazon deal shakes health care firms

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U.S. investors might be gripped by fear of a trade war with China well into the summer. That could keep a lid on stock market gains A big problem with the data is that companies take different approaches to breaking down sales by geography. As we have seen, Amazon lumps all non-U.S. sales together.

When companies trade below book value, it's often for a good reason. Today I'm looking at two companies trading at big discounts to their book value. Is either stock a genuine bargain?

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President Trump’s trade war is escalating. This week, Trump announced fresh tariffs on $200 billion worth of Chinese imports. As expected, China was quick to retaliate. Markets tanked on the news and will continued to be pressured over the short term.

Expect the markets to overreact with each tit-for-tat tariff announcement and each trade-related Trump tweet. It has certainly impacted volatility and along with it, market risk. However, with greater risk comes greater opportunity.

The auto sector has been hit hard by the aluminum and steel tariffs. The rhetoric around North American Free Trade Agreement (NAFTA) has also not helped matters. As a result, the two auto parts companies below are trading at big discounts.

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The world's two biggest economies are now at war over trade . A truce was announced in May, but it proved short-lived. "The United States has kept changing its mind and now launched a trade war ," China's Commerce Ministry said in a statement.

And today, two companies are trading for just 64% and 80% of their book value. Double Trouble. I’ll give these two credit – they’ve been devouring their own dog food lately. Over the last eight months, the boys have bought more than two million shares each.

A small cap with big diversification plans

Exco Technologies Ltd. (TSX:XTC) has been hampered by its significant exposure to the North American markets. Year to date, the company has lost approximately 6% of its value and is trading at the lower end of its 52 week range. The biggest sticking point for this company has been the uncertainty around NAFTA.

The company’s CEO has gone on record saying that they have cancelled any further investment in Mexico until the NAFTA issue is resolved. The company had big plans for Mexico, but these plans have now been shelved.

Exco’s stock is a bargain. The company is trading at a price-to-earnings (P/E) ratio of 10.32 and a forward P/E of 8.31. Likewise, it is absurdly cheap based on its 5.42 enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBIDTA), which is significantly below industry averages.

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A lot of good those warm feelings will do Boeing and Caterpillar: Both are big metal users and face competitive pressures from abroad that a trade war will only intensify. Foreign companies that have followed Trump’s exhortations to do more manufacturing in the U.S. will also have reason to feel sore.

Longer-term, a trade war could damage the automakers by knocking back gradual progress the companies have made in selling more vehicles overseas. Aerospace turbulence. Arconic has been one of the biggest losers among the industrials since the tariff talk heated up, with shares down more

Need further proof? The company’s Graham number is $12.40 per share. The Graham number was created by the father of value investing, Benjamin Graham. The number measures the fundamental value of the company based on current earnings and book value. Exco’s Graham number is 35% higher than its current price of $9.22 per share.

A worldwide leader

Not surprisingly, Magna International Inc.(TSX:MG)(NYSE:MGA) has shrugged off the recent trade uncertainty. The main reason? The company is much more diversified with significant worldwide operations. This is not to say the company is not impacted. After all, Magna is the largest North American auto parts manufacturer and its supply chain relies heavily on duty-free trade.

Company management has been very vocal about the negative impacts of a trade war. Management expressed its concerns in a submission to U.S. Commerce Secretary Wilbur Ross, claiming that tariffs would cause irreversible harm to the industry.

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Why investors in stocks may want to prepare for a trade war by considering shares of utilities and consumer-staples companies —and even cash. The U.S. stock market appears to have shrugged off the likelihood of a trade war . 2 Big Banks Just Hiked Their Dividend.

Will two tribes go to war? US trade representative Robert Lighthizer has said the goal is to pressure China to change practices, and plans to target 1,300 product categories, while limiting harm to US consumers and companies .

Amidst the challenging environment, the company has done nothing but execute as it continues to post record revenues. If not for the trade uncertainty, Magna would surely have posted double-digit gains this year.

Magna is trading at a forward P/E of 10.13 and its P/E to growth (PEG) ratio is 0.70. A PEG below one indicates that the company`s share price is not keeping up with expected earnings. It is thus considered undervalued.

Short-term pain for long-term gain

At this point, an investment in the auto sector is not without risk, as there’s significant volatility in the markets. Until the trade war subsides and a new NAFTA agreement is in place, both of these companies could experience short-term pressure. If your holding period is long-term, both offer great entry points for investors.

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Fool contributor Mat Litalien is long Exco Technologies Ltd. Magna International is a recommendation of Stock Advisor Canada.

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