When I wrote the Wide Moat Daily two weeks ago, I told readers to be ready for a steep market sell-off caused by tariffs.
And… well…
In that essay, I listed example after example of how many of the most famous businessmen and bankers in U.S. history used crashes to their advantage. They turned millions into billions, and they all used different strategies. Some invested in energy or steel, while others focused on banks.
As your brokerage account is likely now reminding you, things go down together. That’s even more true today thanks to ETFs and indexes that treat every company the same. And like every crisis before it, this week’s tariff-induced crash is throwing the baby out with the bathwater.
When I was a trader at a hedge fund during the Great Recession, I learned how to tell which banks would make it and which wouldn’t. Then, I dug through their balance sheets looking for the best deals I could find. Sometimes they were on beaten-down preferred stocks, other times they were on distressed debts. But often, the common stock trading for pennies on the dollar was the best deal of all.
Today, we’re going to take the next step from my previous article. I’m going to give you five sectors that are uniquely positioned to not just withstand the tariff war… but come out as winners.
Every Crisis Is the Same
Every crisis seems different on the surface. Different politician. Different decade. Different cause. But look one layer deeper, and it’s obvious: At its core, every crisis is the same.
The existential threat turns out to be a temporary problem. Stocks that should go down 10% fall 50% or more. And when the storm clears, the same talking heads on TV that told you to liquidate your 401(k) will act like they saw it coming.
They’ll bring on guest after guest explaining how the whole thing was really a buying opportunity. It happened in the Great Recession when the banking system was supposedly done for. It happened during the pandemic when economies were going to be locked down forever.
And it’s happening again right now…
People panic and send stock prices into free fall because they believe this time is different. They sell, only to regret it for the rest of their lives. Too many people, including family members, have shared their painful stories with me.
Instead, take a once-in-a-decade opportunity. Join the ranks of Andrew Carnegie, John Paulson, and J. Paul Getty. Turn other people’s pain into your profit.
And these are the sectors I would do it with…
Consumer Staples
It’s true that most big consumer-staples companies will be somewhat impacted by tariffs. But their businesses allow them to pass on the costs much easier than others. Not only that, but demand for consumer staples is inelastic. That means it doesn’t change much even when the economy weakens.
Procter & Gamble (PG) is the classic consumer-staples pick, but it’s not my favorite right now. The stock is overpriced, and the dividend yield is below that of the S&P 500. Instead, I suggest looking at Hershey (HSY). It’s down about 25% from its 52-week highs, and its 3.3% yield will help you combat inflation. Since the pandemic, Hershey has increased its dividend by 77%. And to be honest, will we even notice if they raise the price of a candy bar?
Pharmaceuticals
Most investors don’t realize it, but pharmaceutical products are among the few goods not subject to the higher reciprocal tariffs. The reason is simple: The government knows that keeping supply chains and pricing stable for this industry isn’t optional.
Yet, most pharmaceutical heavyweights are going down with the ship. Pfizer (PFE), for example, has traded down from 52-week highs of $31.54 to current levels around $24.30. It now pays a 7.1% dividend yield and trades at just 8 times forward earnings. Pfizer really is trading like it’s 2009. And just like back then, shares are a great value.
Telecommunications
Every month, millions of Americans pay their phone and Internet bills. For major U.S. telecom providers like AT&T (T) and Verizon Communications (VZ), tariffs will have little-to-no impact on this core business.
The story is different for telecom-equipment providers. They will have problems with tariffs since much of the manufacturing is overseas. Verizon trades at under 10 times earnings and pays a 6% dividend yield. I prefer it over AT&T, and I’ll explain why using one metric.
Verizon’s debt-to-equity ratio has declined steadily in the past three years while AT&T’s has doubled. Verizon’s A- credit rating (Fitch) bests AT&T’s BBB+ partly for that reason. Yet, you can pick up shares of Verizon at about a 40% cheaper valuation than AT&T and earn a 53% greater dividend along the way.
Why? AT&T cut its dividend by nearly 40% in 2022.
Telecommunications-linked real estate investment trusts are another attractive option. American Tower (AMT) and SBA Communications (SBAC) have shown incredible strength in recent trading as the market realizes their businesses have almost no impact from tariffs and serve as a great inflation hedge.
Energy
This last category isn’t as clear-cut as the others. China, for example, has imposed a 34% tariff on U.S. goods starting on April 10, and that includes energy products. OPEC+ also announced plans to boost oil production by 411,000 barrels. And finally, fears of a global slowdown sent West Texas Intermediate (“WTI”) crude oil down by 7% today. So, what’s attractive about the energy sector?
To start, many American energy companies pump oil and gas from the U.S. and sell their products domestically. It’s true that supergiants ExxonMobil (XOM) and Chevron (CVX) have global businesses that will inevitably get caught up in tariffs. But others, like Devon Energy (DVN) and EOG Resources (EOG), are focused on the U.S. with minimal assets overseas. Tariffs will impact them a little since they buy parts from all over the world, but it’ll be minimal compared with most companies.
And while China and other countries might try to tariff U.S. oil and gas, it won’t work long term. The most intense sanctions regime ever didn’t stop Russia from record energy exports. These are global commodities, and demand for them won’t change simply because a tariff was applied here and there.
And if inflation is a concern, owning energy companies is a proven hedge. Devon Energy is way down from recent highs of $55 and, as I write, can now be bought for under $30 for the first time since 2021. EOG Resources is arguably the most advanced and efficient drilling company in the world. Its shares now trade for just 11 times earnings and fell from $130 to $111 thanks to the recent sell-off.
When It’s Time to Buy Stocks, You Won’t Want To
In my last Wide Moat Daily, I explained that crises like we’re experiencing today are the best opportunity to buy stocks. Yes, it’s painful. Yes, it’s even scary. That uncertainty is the “tariff” we have to pay to get incredible deals on great companies. Nothing is free.
Today, I shared several sectors that are uniquely situated to withstand whatever comes out of the tariff war. We can’t predict the future, but we don’t need to.
Buying a diversified set of high-quality companies during a downturn is the ultimate winning strategy. American investors from Andrew Carnegie to J.P. Morgan proved that over and over again. And if you don’t have cash on the sidelines to use, just staying in the game and not panic selling pays huge dividends.
Regards,
Stephen Hester
Analyst, Wide Moat Research