• Research

Jul 11, 2018

S3 Analytics: China Tariffs Create Pairs Trades in Household Appliance Sector

With President Trump proposing a 10% tariff on an additional $200 billion of Chinese goods following last week’s 25% tariff on $34 billon of Chinese products, many U.S. based retailers and manufacturers will feel the pinch of added costs or higher prices. One of the sectors that will be hardest hit by the impending tariffs is the Household Appliance Sector, where a large portion of product manufacturing occurs overseas. Of the five major domestic Household Appliance companies trading in the U.S. market, three have a majority of their product production based in China.

The three stocks that had the largest losses today have most of their production in China and Mexico. iRobot Corp’s (IRBT) Roomba vacuum is produced primarily in China, as well as most of Hamilton Beach Brand’s (HBB) home appliances and restaurant equipment. Helen of Troy’s (HELE) home, housewares and beauty products are manufactured primarily in Mexico and China.

SodaStream Intl’s (SODA) home carbonation product will escape increased tariff costs by being produced in Israel and Whirlpool Corp’s (WHR) appliances will benefit from being manufactured in Iowa, Oklahoma, Tennessee, Ohio and Massachusetts.

The threat of impending tariffs has already affected short selling over the past month with IRBT, HELE and HBB seeing an increase in short selling, while short covering increased in WHR and SODA. This trend should continue if President Trump’s $200 billion of additional tariffs are approved and there is continued stock price weakness in the household appliance producers with most of their manufacturing base in China.

In addition to shorts covering some of their exposure in WHR and SODA, we should also see increased long buying in these two securities as traders put on tariff based pair’s trades – shorting companies with extensive Chinese manufacturing exposure and going long companies with a strong U.S. manufacturing base.

Want deeper insight into the above analysis? Contact:
Ihor.Dusaniwsky@S3Partners.net
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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