Border Wall Worries Set Up This 27% Trade
Dramatic headlines, mostly related to our new president, have driven the market’s erratic undulations since Election Day.
From my perspective, many investors are reading the headlines and reacting immediately to hyperbole without understanding the details. Making matters worse is social media’s amplification of this hyperbole into viral movements that further distort the truth.
As frustrating as it seems, these factors create opportunity when opinion strays too far from fact. One area where I see massive distortion is in the headlines surrounding Trump’s proposed border wall, the methods in which he intends on paying for it and how it all will affect American companies and consumers.
The topic has sparked tremendous opportunity as sheep-like investors flock to companies they think are the obvious beneficiaries and flee the apparent donors of potential legislation.
The problem is that they’ve got the story all wrong… And my Profit Amplifier subscribers and I found a way to profit from the confusion.
Border Tax Rumblings
If you haven’t been keeping score, Trump signed an executive order to build an impenetrable wall spanning 1,000 miles of the 1,900-mile border between the United States and Mexico. He also promised that Mexico would pay for it in one way or another.
Assuming a wall gets built at all, it won’t be cheap, and getting the Mexican government to pay for it outright isn’t going to be easy. Mexican officials have publicly refused to pay for any part of the wall, and a recent meeting between President Trump and Mexican President Enrique Pena Nieto was abruptly canceled, as both leaders seemed unwilling to budge.
One wall financing idea that’s been floated by our administration and bloated by the media would be a possible 20% border tax on U.S. imports from Mexico. Even the notion of a “border tax” has negatively affected hundreds of companies from food to cars, beer, tequila and more.
Like they often do, investors have overreacted — both to the potential for a border tax and the likelihood of it being a simple 20% tariff on all imports from our southern neighbor, who also happens to be our third largest trade partner and second largest import partner.
A true border tax would punish not only Mexico, but American taxpayers as well. A tax on imports would trigger a rise in the cost of vehicles, electronics, machinery, furniture, medical supplies, plastics, food and more. In short, the effects could be disastrous.
Many experts wouldn’t be surprised if Mexico retaliated and slapped a tariff right back on American imports, doubling the cost effects on American consumers.
A jump in the cost of imports or massive corporate layoffs due to decreased earnings could potentially ruin Trump’s plan to make America great again. My point is that a flat tax is not a simple fix.
Even if Trump decided to move forward, he could only enact a temporary tax for 120 days, after which time a permanent, congressionally approved tariff would need to be put in place — and that wouldn’t be easy with a trade-supportive Republican House and Senate.
Borders and Beer
One popular Mexican import is beer. Even though it’s just a small part of the nearly $600 billion in trade between our countries, the specter of rising beer costs has investors in a panic.
Corona, the number-one Mexican beer import, is owned by Constellation Brands (NYSE: STZ), the same company that owns Modelo, Pacifico and Victoria beers, as well as Svedka vodka and a myriad of popular wine brands sold mainly in the United States.
Constellation, unlike Anheuser Busch InBev (NYSE: BUD), is an American company and generates 91% of its profits here in the states. But unlike BUD, Constellation has been enjoying tremendous earnings growth with a recent earnings and revenue beat that triggered a slew of upgrades from analysts.
Constellation grew sales by 10.4% compared with last year, and earnings per share (EPS) were up nearly 40% — both of which compared favorably to the S&P 500 (2.77% and 4%, respectively).
Even after the election, knowing Trump’s promise for a wall and a potential border tax, analysts have been upping their price targets for STZ, up to a recent average of $180.
Yet post-election, STZ started dropping after hitting a high near $174 in early October. Shares have spent the past few months forming a bullish base of support around $146, which typically signals an end to the bearish pressure. With all this blatant bullishness, you’d expect shares of Constellation to skyrocket, but concerns over a border tax had kept STZ depressed.
Reactive investors ignored analyst calls for several months, even as fundamentals in the stock strengthened. But the weakness in STZ seemed unlikely to continue. Why? The U.S. dollar has gained more than 42% against the Mexican peso since December 2014 — essentially double the proposed tax. And that strong dollar (which would only increase in value with a tax) would cancel out the potential price increases due to a tax.
Because Constellation is an American company, its cost of labor and operations in Mexico are reduced when the USD is strong. And since the company sells the majority of its beer here, it’s able to capture that profit by selling goods back in the states.
The bottom line is that the smart money doesn’t believe a border tax is right or will even occur. And the vast majority of the 20 analysts that follow Constellation believe the risk is minimal. Would it make sense for almost every analyst to have a price target above current levels if they believed a Trump tax was going to wipe away Constellation’s profits? I don’t think so!
Using technicals as a guide, we took advantage of this unfair selling pressure and set a target near the top of the stock’s recent trading range, around $156, which was still far below where savvy analysts believe shares should be trading.
The next technical resistance was above our target at the 200-day moving average, around $159, giving us a “technically simple” path to potential profits as we waited for investors to get behind STZ.
One possible way to profit from this trade would be to simply buy shares. When I recommended this trade, STZ was priced just below $150, which means a move to my $156 target would only represent a profit of $6 per share, for a 4% return. While that’s not bad for a short-term trade, I had a better idea.
You see, by using my Profit Amplifier strategy, my subscribers were able to take that small 4% move and turn it into a nice 27.3% gain in just seven days.
While I can’t give you all the details on how I’m able to turn modest, single-digit moves into large double-digit gains (it wouldn’t be fair for my Profit Amplifier subscribers), I will say that my newest recommendation — which I’ll be releasing in the next 24 hours — has the potential to turn a small 3.7% move in an overstretched market into a 21.6% gain.
For each trade, I provide readers with clearly laid-out trade that can amplify potential gains without substantially increasing downside risk. And in today’s low-rate environment, this type of strategy is more crucial than ever. If you’d like to learn more about my upcoming trade and the others I’m currently recommending, I invite you to follow this link.