Trade War? These Stocks Will Do Best

If tariffs soar, the economy will take a hit. But firms that don't rely as much on global trade will be harmed less than those that do.

What started in January with steep new U.S. duties on washing machines and solar panels spread in March with major tariffs on steel and aluminum, followed by a tit-for-tat exchange with China. Next stop: a full-fledged global trade war? The U.S. is not as dependent on trade as other countries are. In 2017, our exports totaled $2.3 trillion, or about 12% of gross domestic product, and imports totaled 15% of GDP. Still, if trade barriers go high enough, we'll face harrowing consequences. High tariffs raise the price of imports, giving domestic producers an incentive to raise their own prices, increasing the burden on U.S. consumers.

Meanwhile, as China and other countries retaliate, foreign markets shrink, harming U.S. export industries. Domestic manufacturers are also hurt as the cost of their supplies from abroad (such as steel) rises.

Although we can still avoid pitched economic battle, now is the time to prepare your portfolio in case the worst happens. The entire U.S. economy will suffer in a trade war, but firms that do not rely so much on global trade (both exports and imports) will be harmed less than those that do. Here are the categories likely to avoid much of the pain.

Utilities. Companies that provide gas and electricity don't have to worry about tariffs or other trade barriers. Nearly all the natural gas, coal, nuclear, solar and wind energy that power the utilities' generators is domestic, and utility companies based here serve the U.S. market almost exclusively. Some of the larger companies look awfully attractive.

Duke Energy (symbol DUK, $78), the second-largest utility in the U.S. by market capitalization (number of shares times price), provides power in the South and Midwest. The stock has a 4.6% dividend yield and a price-earnings ratio, based on expected profits for 2018, of 17–in line with the broader market. Another good choice is Chicago-based Exelon (EXC, $39), which operates 11 nuclear plants and provides power to 10 million customers through regulated utilities in its home state and the mid-Atlantic region. Exelon has a P/E of 13, based on projected earnings for 2018, and a current yield of 3.6%.

I am less sanguine about the world's largest utility, NextEra Energy, which owns Florida Power & Light and generates and distributes electricity throughout the country. Florida depends heavily on international trade, and if its agricultural exports take a hit, demand for energy will drop.

NextEra is the number-one holding of Vanguard Utilities Index (VPU, $112), an exchange-traded fund with an expense ratio of 0.1%. But with 75 holdings, the fund is broadly diversified and carries a yield of 3.6%–more than that of a 10-year Treasury note. Another good ETF is Utilities Select SPDR (XLU, $50), with expenses of 0.13% and a yield of 3.8%.

Internet companies. No one knows where a trade war will lead, but the internet will almost certainly remain a tariff-free zone. That means clear sailing for companies such as Netflix (NFLX, $328), with 125 million video-streaming subscribers (about half of them in the U.S.); (AMZN, $1,527), not only the largest online retailer but also the king of cloud computing; and (CRM, $123), a fast-growing provider of business software. A broader internet play is First Trust Dow Jones Internet (FDN, $126), an ETF that includes all three of these stocks among its top six holdings.

Restaurants. If U.S. farmers and ranchers face growing barriers to selling their goods abroad, then prices at home should decline in the short term as supplies of meat and the grains that feed U.S. livestock rise. That's good for restaurant chains, including McDonald's (MCD, $159), which gets all of its chicken and nearly all of its beef for its U.S. restaurants from domestic sources. It's unlikely that the U.S. will raise tariffs against the African, Asian and Latin American countries that supply us with coffee; after all, we grow almost no coffee here at home. So Starbucks (SBUX, $58), one of my favorite companies of any kind, will be well insulated from a trade war.

Casino operators. Other than a possible increase in the price of construction materials to build casinos, domestic gambling companies won't have to worry about rising trade barriers. The only worry is that China will retaliate against U.S.-owned casinos in Macau, which is the largest gambling destination in the world. So I will eliminate from consideration such companies as MGM Resorts International and Las Vegas Sands. I'm more drawn to smaller, domestic casino chains. Eldorado Resorts (ERI, $40) has a market cap of $3.1 billion and operations in cities including Shreveport, La., and Kansas City, Mo. Boyd Gaming (BYD, $35), with a market cap of $3.9 billion, focuses on areas outside the strip in downtown Las Vegas, plus the Midwest.

Hospitals. It's possible that some hospital-equipment costs will rise in a trade war, but operators can almost certainly pass on those extra expenses to insurers, governments and patients. Otherwise, hospitals are well protected against the effects of a trade war. Consider HCA Healthcare (HCA, $97), the largest private hospital chain in the U.S., with about 300 facilities in 20 states, mainly in the South. HCA carries a P/E of just 11. Trading at a P/E of 12 is LifePoint Health (LPNT, $50), a much smaller chain (about one-sixth the revenues of HCA) whose shares have slid 43% since peaking in the summer of 2015, mainly because of concerns over declines in in-patient admissions. But the price is right for investors comfortable with more risk.

Regional banks. Large banks with international operations will probably suffer in a trade war, but regional U.S. banks should be unaffected–unless the economy falls into recession. I have long been fond of Iberiabank (IBKC, $75), based in Lafayette, La., with offices in eight southern states, and Cullen/Frost Bankers (CFR, $108), a Texas-centric bank founded in 1868. For diversification, my favorite ETF in this sector is PowerShares KBW Regional Banking Portfolio (KBWR, $57), with 50 holdings, none of which represents more than 4% of total assets.

Good bets, regardless. Other stocks worth considering include residential real estate investment trust AvalonBay Communities (AVB, $161), property-and-casualty insurer Progressive (PGR, $61) and federal contractor Science Applications International (SAIC, $85). These domestic stocks represent solid long-term buys, even if (as I hope) an all-out global trade war never happens.

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