The trade war is tanking many stocks, maybe most pointedly in semiconductor and technology stocks that have significant ties to China as both in terms of sales and supply chain.
However, for longer term equity investors, safe, stable ground is available even in this market.
“We want global champions,” Brian Yacktman, President and CIO of YCG Funds and portfolio manager of the YCG Enhanced Fund (YCGEX – Get Report) told TheStreet. “We’re meaning that they’re very deeply entrenched in the economic system and the key characteristics we’re looking for is that these global champions have enduring pricing power.”
He noted that the enduring pricing power he seeks is insulated from tariffs and trade concerns, as the ability to dictate prices allows a company to pass on tariff costs to consumers seamlessly if it cannot, ideally, avoid them in the first place.
“This is important because we live in a world where in real terms, prices are coming down everywhere,” he added, irrespective of tariff trouble.
Yacktman explained that due to inflation and technological advancements, the prices of goods are coming down significantly across many industries. While this is good for consumers, it is less than ideal for shareholders.
“You can see that really obviously in something like your cell phone in your pocket where if you would want it all the capability of a cell phone today or go back 40 years, it would cost over a million dollars.” Yacktman cited as an example. “Clearly no one’s paying $1 million for their cell phone capabilities.”
He cited this as an example as to why he has avoided semiconductor stocks, like Real Money’s Stock of the Day Qualcomm (QCOM – Get Report) , in his portfolios despite their popularity in recent years.
“We find that hardware is an area where we want to avoid because it’s not going to turn into enduring pricing power,” Yacktman explained. “Technology often is something that the consumers are the beneficiaries, not the investors.”
He added that the cyclical and capital intensive nature of the semiconductor industry, as well as its highly competitive landscape makes it riskier for long term investors, despite the secular trends of digitization.
He suggested that less commoditized technology stocks like Facebook (FB – Get Report) or Alphabet (GOOGL – Get Report) are preferable and offer more avenues to return on investment for shareholders, making them key plays in his portfolio.
To hear Yacktman’s top pick for his portfolio in 2019, check out the video above.
Go Behind the Label: Inside the History of Qualcomm
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