The COVID-19 coronavirus is having a massive impact on manufacturing in China. And the "experts" on Wall Street are largely overlooking this problem.
Yes, the markets are now in correction territory. The S&P 500 is down 13% from its February high.
But things could get uglier.
You see, the lag that follows in trade will be very disruptive for companies that rely heavily on production in the world's second largest economy.
While everyone is thinking about Apple Inc. (NASDAQ: AAPL), there are many other companies that are going to take a very hard hit from the ongoing freeze in China's manufacturing sector.
Several of these may be lurking in your portfolio without you even realizing it.
These five stocks should be avoided now...
Stocks to Avoid Now, No. 5
Qorvo Inc. (NASDAQ: QRVO) manufactures radio frequency (RF) and Wi-Fi modules. It generates almost half of its revenue from two companies: Apple and Huawei.
It also generates more than one-third of its revenue from China and boldly projects that China's handset market is its key to future growth. Right now, demand is falling, and the forecasts of more than 7% revenue growth and earnings growth next year don't look likely.
The company's leaders have said they're watching the outbreak with "extensive checks on the supply chain."
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That uncertain outlook indicates Qorvo's growth could decelerate significantly if the outbreak worsens.
Shares are already off more than 16% from their December highs.
However, we could see downside for this stock under $80 if the coronavirus outbreak worsens. Shares trade over $95 today.
Stocks to Avoid Now, No. 4
Restoration Hardware Holdings Inc. (NYSE: RH) received a boost last quarter on news that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK.A) had a big stake in the furniture company.
Despite that, shares have fallen by 30% since Feb. 18. It's not unreasonable to think RH has another 20% to drop.
China is the world's largest exporter of furniture, and the nation produces these products for countries all over the world. Restoration Hardware is already facing a significant challenge given that its sales strategy centers on storerooms (which people will avoid during an outbreak) and negative economic outlooks.
Factor in that the company produces about 35% of its products in China as of 2018, and you have a firm that could see its stock plunge if its supply chains are dramatically affected.
Stocks to Avoid Now, No. 3 and No. 2
China is considered one of the top auto-parts markets given its solid production efficiency and advanced technology. But the automotive industry is facing serious challenges in China and in other countries around the globe.
Hyundai Motor Corp. (OTC: HYMTF) said two weeks ago that a shortage of auto parts will lead to the suspension of production in its South Korean plants. Meanwhile, Fiat Chrysler Automobiles NV (NYSE: FCAU) might have to suspend production in Europe given the slowdown in parts manufacturing.
That makes those stocks No. 3 and No. 2 on our list.
Auto companies are already facing dire economic outlooks while watching companies like Tesla Inc. (NASDAQ: TSLA) pull away investor capital. A prolonged slowdown would ripple through the entire supply chain up to the dealerships.
Fiat Chrysler was already sitting at lows last seen in 2017. Shares could easily fall under $10 in the coming months should supply chain challenges compound with greater economic uncertainty. Right now, FCAU is just under $12 per share.
Stocks to Avoid Now, No. 1
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The No. 1 stock on our list today is Tapestry Inc. (NYSE: TPR)
Finally, it's going to be a very ugly year in the fashion and handbag industry if supply chains remain locked up in China. Tapestry is the firm behind popular brands Coach New York, Kate Spade New York, and Stuart Weitzman. Shares have plunged by more than 20% over the last two weeks. However, investors can anticipate more pain if China's bag and accessories industry (which has increased by 14.5% annually in recent years) shows signs of contraction.
Sitoy Group Holdings is a Hong Kong--based manufacturing company that has more than 8,300 people on its manufacturing team. The company produces Coach and Prada SpA handbags and makes products for Fossil Inc, Michael Kors, and Lacoste as well.
The manufacturer was already facing a slowing market for bags. It already announced that its profits last year fell by 55% to 65%. Stalled production could impact Tapestry and many other companies that need to bring product to market.
Action to Take: The disruption of manufacturing in China is impacting stocks in every industry. But the stocks mentioned above may be hit worst of all. We do not recommend buying into any of these stocks right now. If you're holding these stocks, it may be time to cut losses and move on.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.