We’ve argued that Tariffs are not a bargaining chip and they are here to stay…. for the most part at least. This is for three distinct reasons.
Protectionism - Over the years, free trade agreements and a strong dollar have led to American industries and manufacturers becoming relatively uncompetitive. This has fueled a massive trade deficit that has only been growing. The tariffs can help American companies compete again, and many companies will consider onshoring.
National Security - When the pandemic hit, most countries started to realize how dependent they were on supplies coming from other countries. With shutdowns across the world, people in the US suffered due to the lack of key goods. We all remember how GM was asked to start making ventilators.
Revenues - While DOGE seems promising, and many have high hopes for them, it’s doubtful that they will be able to sufficient cost reductions for the tax cuts, and reduction in the budget deficit. Tariffs, therefore, remain an important srouce of revenue.
President Trump is determined not to allow any of that again and this is yet another reason to lower energy costs. Onshoring factories will require a massive amount of power and capital commitment. However, while the initial outlay may put pressure on a company’s finances, in the long run, it will align with the trade policies that the US is moving towards.
But, how do we make the best of that with our investments?
We’re looking for the following:
Companies with Pricing Power - As a first step to tariffs, we want companies that have pricing power such as GE or Caterpillar, and can push the tariff back on the supplier.
Companies that have dry powder - Eventually even these companies will consider moving more of their manufacturing onshore. So we want to look for companies with the capital or ability to raise capital to build factories.
Companies that already have a domestic focus - This is where small and mid (SMID) caps come into focus. As the bigger companies with overseas exposure navigate the tariff waters, SMID caps “Made in America” become competitive.
Companies that could be acquisition targets - Some SMID cap companies may be ideal acquisition targets since they already have a setup in the US, that can be expanded or repurposed.
With these criteria in mind, we have been screening for investment ideas that may prove to be relatively resilient as tariffs and other government policies are implemented.