Apple (NASDAQ: AAPL) is getting the double-whammy. First, China has started a ban on the use of iPhones at government agencies in China – for security purposes. This is obvious retaliation for the U.S. ban on advanced semiconductor sales to China.
The timing of this iPhone ban is interesting. Because Chinese tech giant Huawei just released a phone that is every bit as robust as an iPhone, but runs on chips made in China. It is as if China is saying “we don’t need iPhones, we have something just as good.”
And you know – any area where China can give the U.S. a little comeuppance, it will jump at the chance.
Now, this is all stuff that we’ve talked about a lot over the last year. The moves by U.S. companies to move supply chains out of China – a trend I’ve dubbed the Second American Industrialization – is already putting a lot of pressure on the Chinese economy. You can see it in China’s slowing growth numbers and also in the reduction of China’s exports.
The restrictions on high-end semiconductor sales to China has really pushed the relationship between the U.S. and China into the “adversarial” zone.
I’ve repeatedly said that it’s only a matter of time before China starts to retaliate to U.S. trade restrictions with restrictions of their own. So far, China’s made a few small moves, like subsidies for Chinese EV makers to make them more competitive against U.S. EV makers in China – this is one reason (that Tesla (NASDAQ: TSLA) has made such dramastic price cuts to its cars in China…
China has also threatened to restrict some rare earth mineral exports. Lithium is another pretty obvious choke point where China could apply some pressure. With both lithium and rare earths, it’s important to remember that China dominates the refining of these critical minerals, but not the supply. That’s an important distinction that I’ll discuss more in a minute…
But first, it’s important that we don’t underappreciate the significance of China’s actions against Apple and the iPhone. Apple is the second biggest company in the world. And as quintessential American brands go, well, Apple’s right up there with Coca-Cola (NYSE: KO), Harley Davidson (NYSE: HOG) and Starbucks (NASDAQ: SBUX).
You gotta think that any brands with substantial exposure to China have a target on their back.
In 2022, Apple got $74 billion in revenue from China. Even though that’s just 20% of Apple’s revenue, it’s still a big number. And I can’t tell you how much of that $74 billion in China revenue is at risk – but it’s not zero.
And while Apple may be the most obvious company with substantial exposure to China, it’s not the only one. Nor is it the most dependent on China.
Both GM (NYSE: GM) and Tesla (NASDAQ: TSLA) have about half or their production capacity in China. Virtually all of Starbucks growth is coming from expansion in southeast Asia and China. Mobile chip company Qualcomm (NASDAQ: QCOM) gets at least half its revenue from sales in China. (For more detail, check out my Special Report 5 China Dependent Stocks to Sell Now. It’s available free on the Pro Trader Today website).
As far as I’m concerned, there is no reason to invest in Chinese stocks. Companies like Alibaba (NASDAQ: BABA), TenCent (TCEHY) and even EV maker BYD (BYDDF) are off limits to me. Because I don’t have any way to assess the risk for these stocks. Because there’s no way to anticipate the latest policy whims from China’s government.
And while I may not have stocks like Qualcomm or even Apple on my “do not invest” list, I am leery of them. Qualcomm obviously has a corner on the mobile chip market. And the stock is cheap, trading with a forward P/E of 11 and a PEG ratio of 1. But I can’t say for certain how its dependence on China will play out. None of its valuation metrics will be relevant if it loses a big chink of its Chinese revenue.
Apple may not have that same level of risk, but it did just lose $200 billion in market capitalization in two days after China announced its mini-iPhone ban. And I, for one, don’t want to lie awake at night with Xi Jinping’s face in my head, wondering what he’s gonna do next.
Of course, where the state of U.S./China relations are a distinct risk for some companies, there are some amazing opportunities for the companies that are rebuilding critical supply chains here in the U.S. Like with rare earth and lithium supply that I mentioned earlier…
Can You Dig It?
That’s really the issue when it comes to both lithium and rare earths. China mines less than half of the world’s supply for each of these critical elements. It’s refining where China holds a dominate position.
MP Materials is on track to double both earnings and revenue in 2024. That’s good. And the stock is as cheap as it’s been over the last year. Which should be good too.
Today I wanna add Lithium Americas (NYSE: LAC) to my recommended buy list.
You may have heard of Lithium Americas by now. It’s currently working up the Thacker Pass lithium mine in Nevada to create an American source for the refined lithium that goes into lithium ion batteries for EV makers. With China dominating lithium refining and the lithium ion battery market, any project to bring lithium production to North America should be considered mission critical.
Now, Lithium Americas isn’t the only company that’s bringing lithium production to North America. Heavyweight Albemarlet (NYSE: ALB) already produces lithium in North Carolina. And there are several start-ups getting mining and refining projects underway.
But Lithium Americas is the most exciting, for two reasons…
The first involves GM (NYSE: GM). GM is investing $650 million into Lithium Americas, to secure a supply of lithium for EV batteries. That’s a pretty strong vote of confidence.
The second reason to be bullish on Lithiums Americas is its Thacker Pass lithium deposit in the U.S. When completed, Lithium Americas Thacker Pass lithium mine will be the biggest in the U.S., with 40 years of production likely…
You can see where this mine is located on this map. Thacker Pass is one section of a much bigger lithium deposit, called the McDermitt Caldera. A trio of geologists from Lithium Americas just published a report in Science Advances about how the McDermitt Caldera became one of the biggest lithium deposits in the world.
The McDermitt Caldera lithium deposit can help make the U.S. lithium independent. And Lithium Americas has a foothold in this region, potentially one of the richest lithium deposits in the world.
At around $18 a share, Lithium Americas is as cheap as it’s been in 2 years. It’s all-time highs came back in early 2022, at $40 a share. The stock is a pretty good bet at current prices. That’s why I’m adding it to my recommended buy list today.
That’s it for me this week. Take care, have a great weekend and I’ll talk to you Monday…