In recent months, traders have seen news stories move stock markets. They have always known this. We often see stock prices make sharp moves after earnings announcements. But, in the past year we have seen widely anticipated events move markets in unexpected ways.
Let’s consider the US Presidential election as an example. Heading into election day, it was widely believed that Hillary Clinton would win while a surprise victory by Donald Trump would set off a bear market. As the election results became clear, the overnight markets seemed to validate these opinions. Futures on the S&P 500 fell quickly and trading was halted for a time after a 5% price decline. The next day, stocks opened up and continued higher for months.
This was a faster version of the market action we saw in July. Voters in the United Kingdom went to the polls that month to decide whether or not they wanted to stay in the European Union (EU). Their decision to leave the EU was viewed as an economic catastrophe by a number of economists, government officials and market experts. A one day sell in the benchmark stock market index was quickly followed by a sustained rally.
Under the Efficient Market Hypothesis (EMH), these trading opportunities shouldn’t exist. The EMH tells us that market prices incorporate all known information into the current price. New information is immediately incorporated into the price.
Applying the EMH to the US election, market prices prior to election day incorporated the conventional wisdom of a Clinton win. This meant little would change immediately as she was widely expected to maintain much of the Obama administration’s policies. As the surprise in the results became clear, the selloff incorporated the uncertainty a Trump victory brought to the policy arena. There is no way for the EMH to explain the sudden upward reversal that occurred on the open.
Conventional wisdom was wrong. Trump’s victory did not trigger a bear market. Neither did the Brexit vote in July. But these events can provide traders with important lessons. Looking ahead, it will be important to remember that news can be bullish. This might simply be because the news itself breaks an air of uncertainty. After Trump won, there was no longer any doubt – he would be President and the results probably wouldn’t be as bad as initially feared. This outlook, and an eye on the news, might help us spot additional trading opportunities.
One big news story that might create an opportunity began to develop in late April. Rumors began to circulate that President Trump was set to sign an executive order withdrawing from the North American Free Trade Agreement (NAFTA), a trade deal between the US, Mexico and Canada. Later, Trump told reporters that he had instead decided to renegotiate NAFTA rather than terminate the comprehensive trade deal after speaking with the leaders of Canada and Mexico.
Conventional wisdom is that leaving NAFTA will create chaos. Headlines proclaiming, “Ending NAFTA Would Be The Disaster” appeared on major news sites. But, the disaster has been averted. Negotiations involve a degree of uncertainty. So far, this news story is set up as the election trades with an expectation of devastation followed by uncertainty. In the end, the outcome is unlikely to be as bad as feared.
This means it could be time to buy stocks which are headquartered in Mexico and Canada. We searched for low priced stocks that could benefit from news related to NAFTA. The stocks needed to be liquid and traded on US exchanges. We also required the stocks to trade for less than $10 to provide plenty of upside potential. We found four stocks that passed all of our tests.
Grupo Financiero Santander Mexico, S.A.B. de C.V. (NYSE: BSMX) provides financial services to individuals, private banking clients, small and medium-sized enterprises, government institutions, and corporate and institutional customers primarily in Mexico. It operates through Retail Banking and Global Corporate Banking segments. The company offers deposit products, such as current accounts, savings accounts, and time deposits, as well as certificates of interbank deposit; and payroll loans, personal loans, credit cards, mortgages, and insurance brokerage services. The company is also involved in corporate lending activities.
BSMX is the only Mexican company that passed our screen. The stock is trading with a price-to-earnings (P/E) ratio of about 15 based on this year’s expected earnings. BSMX also offers investors a dividend yield of about 7% at the current price.
We found three Canadian companies that qualified as NAFTA trades.
Enerplus Corporation (NYSE: ERF) is focused on the exploration and development of crude oil and natural gas in the United States and Canada. The company’s oil and natural gas properties are located primarily in North Dakota, Montana, and Pennsylvania; and Alberta, British Columbia, and Saskatchewan.
Although headquartered in Canada, ERF has broadly diversified operations. The company is an oil and gas play and should benefit from a potential rebound in oil prices. Analysts expect the company to report to profitability this year and a dividend is likely to be paid given management’s past track record of rewarding shareholders.
McEwen Mining Inc. (NYSE: MUX) explores for, develops, produces, and sells gold, silver, and copper ores in Argentina, Mexico, and the United States. Its principal asset consists of a 49% interest in the San José mine in Santa Cruz, Argentina. The company’s principal assets also include 100% interest in the El Gallo 1 mine and El Gallo 2 project in Sinaloa, Mexico; the Gold Bar project in Nevada, the United States; and the Los Azules copper project in San Juan, Argentina. It covers an area of approximately 1,132 square miles and comprises 137 mining concessions consisting of 69 approved mining claims; 52 claims that are in the application process for mining claim status; and 16 are for exploration only.
This is another Canadian company with global operations. Canadian companies are among the world’s foremost experts in mining and MUX could benefit from turnarounds that appear to be underway in the metals markets. MUX also pays a small dividend and yields about 0.34% a year. This makes the stock available for purchase by investment managers focused on income who want exposure to metals. Although small, the dividend does create potential demand for the stock among those investors.
Nevsun Resources Ltd. (NYSE: NSU) engages in the acquisition, exploration, development, and operation of mineral properties in Africa. The company explores for gold, copper, zinc, and silver deposits. Principal assets include its 100% interest in the upper zone and 60.4% interest in the lower zone of the Timok project, a copper-gold development project in Serbia; and its 60% owned Bisha mine in Eritrea. It also has two mineral exploration concessions and two prospecting concessions in Macedonia.
This Canadian company exports its mining expertise around the world. Analysts have a price target of $3.86 on this stock, indicating a potential gain of more than 70% is possible.
These four stocks offer a way to trade NAFTA news when it comes. Aggressive investors might want to buy now since the nature of the news may be unpredictable in the future. Negotiations don’t usually follow a strict timetable like an election does. Aggressive investors may worry by the time the news is announced, the stocks may have enjoyed large moves. More conservative investors may want to monitor the news and buy when the negotiations appear to be making progress.