How much China? A lot of China? Too much China? No China?
That's pretty much the litany of every fund manager in the country before they pull the trigger and it's become depressingly familiar...and correct. It's the main issue that drives stocks pretty much day in and day out and the far-reaching nature of the trade war each reaching everything from Tesla (TSLA) to Kohl's (KSS) to Workday (WDAY) and ServiceNow (NOW) .
You can't start a discussion about the issue, though, without going right to the most impacted stock on earth: Apple (AAPL) . Everybody knows that Apple has plenty of exposure to China. But how much?
Well, you can thank Goldman Sachs (GS) for figuring that out for you. This morning Goldman put out a piece saying that the max earnings sensitivity is 29%, meaning that Apple's annual total earnings per share exposure is about 29% or $3.35 a share. Obviously the stock, at $183, is not ready for that kind of earnings. Worse: Goldman says Apple's supply chain is deeply enmeshed in China and that Apple simply couldn't wean itself off of China any time soon. It could hit the company hard - as well as China itself - if Apple can't make its handsets in China. "We believe," the report states, "that Apple is near its annual rapid ramp of new iPhone production could have longer term consequences for the company."
Now everyone knew there had to be some impact. But this much? You are going to have to strap yourself in as my trust, Action Alerts PLUS, is doing if you want to own this stock. I say own it don't trade it but these numbers are not for the squeamish. Remember we've not heard a peep about how Apple might be in trouble in China. It's got more than 2 million people writing apps for Apple in China besides the actual assemblers of the iPhone. Apple's so integrated into the culture that it is hard to even contemplate how the Chinese would shut it down.
But it is reasonable to believe that if President Trump keeps blacklisting tech companies, then you can expect something to happen to the Cupertino giant.
How ugly could this get? Steve Bannon, the president's former strategist, is saying that shutting down Huawei is more important than any trade deal. To be specific, he says it is "ten times more important because the Chinese telecommunications company is such a rogue security risk."
Bannon wants to step up the pressure on the PRC... "The next move we make is to cut off all the pension funds and insurance companies in the U.S. that provide capital to the Chinese Communist Party," he said in a just given interview.
Now given that this is something I have been calling for for ages, I am surprised this is the first I have heard anyone else say it. And while Bannon is not in the administration I think it would be wise, and not just because the IPO market has been a fount of money for the Communists, it's also a source of tremendous pain for investors. Of the 31 Chinese IPOs that came to the U.S. markets last year, 21 are in negative territory and another is about flat. Only six of the 31 names are up from their first trade price and 24 are in the red. That's astoundingly bad. Fifteen are down 20% or more from their IPO deal price. Eleven are down 30% or more from their IPO deal price and seven are down 40% or more. Steve Bannon save us from these Chinese IPOs.
How bad can it get?
Witness the most recent thanks-for-nothing deal, the IPO for the jerry built Luckin Coffee (LK) , a deal I did my level best - or worst if you are from the PRC - to get you to sell. As in typical fashion the deal, priced at $17, opened at $25 and is now, you bet, at $15.43, down 11% today.
I checked in with Howard Schultz, the founder of Starbucks (SBUX) this morning, who urged me to tell you how it would most likely be a real bust given how its been thrown together almost overnight. Howard wrote "I hate to say I told you so. I'm not clairvoyant but unlike the herd mentality that chased this over-hyped money losing start up, I saw first hand in all my visits to China these last few years, exactly what Luckin is: nothing more than a financially engineered Chinese version of Boston Chicken," the infamous flame-out of a chain that has similar fanfare. A contrast? Starbucks, he says, "will continue to build our business the old fashioned way. Embracing a long-term China strategy linked to build a values based business in which leaders as and managers we exceed the expectations of our people so they in turn can exceed the expectations of their customers."
Now it's not just tech. Retailers are reporting right now and besides earnings per share and same store sales, the analysts are looking for how much Chinese exposure companies have. Now some of these companies suffered from weak execution, including Kohl's and Nordstrom (JWN) . But Kohl's flunked the China test, having way too much exposure versus many other companies. The stock's still falling for multiple reasons. If you contrast Kohl's with Target (TGT) , which had great numbers and made you feel that tariffs are no big deal, you can figure out why Target's stock is screaming higher while the stock of Kohl's is plummeting although, to be fair, I do think that down here it makes a pretty decent investment. That said, the pattern is that Target's stock will get multiple upgrades and it will keep flying.
Nvidia's (NVDA) stock keeps getting hammered. We spoke to the company last week and came away far less worried about its exposure, longer term, to China but that said, investors are saying otherwise. Some are concerned about a Chinese gaming slowdown and others are wringing hands over whether the Chinese will let Nvidia buy Mellanox (MLNX) , an Israeli company that would be a nice complement to the chip company's business, so nice, that CEO Jensen Huang told us the Chinese want to bless the deal.
Oh, and then you have Huawei itself. The executive branch may be trying to ban Huawei but we got a federal court ruling last night that said Qualcomm (QCOM) has been a monopolist and has used its monopoly to extract too much wealth from its customers, most prominent of which is none other than Huawei. It would have been Apple but that company settled with Qualcomm before this ruling. C'est law vie.
Oh, and how about the companies with no real exposure to China? These remain halcyon days. Consider the cloud kings which have no exposure to China to speak of: Workday (WDAY) , up $3.5, ServiceNow up 2.82, VMware (VMW) advancing more than $2 and Adobe (ADBE) , which is up more than $4. Remember Adobe CEO Shantanu Narayen famously told us that Adobe's in China but that's because there are a lot of pirated Adobe products. Well doesn't that say everything you need to know.
Now we know that the Chinese situation is not about to resolve itself any time soon. I think it gets worse before it gets better. I am not advising that everyone skidaddle from every company with a defined exposure to China. I just wants you to know what you own so that you are not surprised and are ready to buy if the exposure is minimal or the stock has been so hard hit that it make no sense with or without China business.
(Kohl's, Apple, Goldman Sachs and Nvidia are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells KSS, AAPL, GS, or NVDA? Learn more now.)
