U.S.-China tensions over trade may have abated for now, but with China ready to escalate at any moment, CNBC's Jim Cramer wanted investors to be prepared for potential pain.
While shares of Caterpillar have more than tripled since their early 2016 lows and business at the construction equipment giant is booming, Cramer warned that it does a lot of business in China.
And despite the stock's rally after China President Xi Jinping struck a more conciliatory tone on trade in a recent speech, Cramer saw Caterpillar as an obvious target for Chinese retaliation.
"You should swap out of CAT and swap into United Rentals, URI, the big domestic machinery rental play," he recommended. "United Rentals gives you the same great earth-moving and construction equipment exposure that Caterpillar does without any of the China related risk."
Here's why Cramer would buy United Rentals' stock over Caterpillar's:
For one, United Rentals does 91.5 percent of its sales in the United States, with the remaining 8.5 percent coming from Canada. Caterpillar, however, gets less than 41 percent of its sales from the United States — the rest comes from overseas.
"It's true that only an estimated 5 percent of CAT's current sales come from China," Cramer admitted. "But here's the thing: the Chinese market is a huge component of the company's long-term growth strategy."
In the last year, the Asia-Pacific region grew at a rate of 40 to 51 percent, making it the fastest-growing region on Caterpillar's books. That gave Caterpillar a major boost when North American markets weakened, but the potential for a trade war threatens the numbers, Cramer said.
Cramer also took a merit-based approach to United Rentals' business. Trade disputes aside, the rental giant has a better mix of end markets than Caterpillar for the current environment, he said.
About 50 percent of United Rentals' business comes from industrial and non-construction rentals. Forty-six percent of that comes from commercial construction, which improves when the business cycle picks up, as it is now, the "Mad Money" host said.
As for Caterpillar, roughly 40 percent of its sales are tied to construction, and about 50 percent are tied to the energy, transportation and natural resources industries.
"Caterpillar has a lot more exposure to commodities, and while commodities have been trending higher of late, these resource-related industries are much more boom and bust," Cramer said. "When those industries drop off, they really drop off. That probably won't happen any time soon, but United Rentals is much closer to a pure play on the resurgent U.S. economy and that's what we like in Cramerica."
Third, Cramer considers the equipment rental business to be stronger than the equipment manufacturing business. United Rentals' margins benefit from not having the fixed costs that Caterpillar has from actually making the equipment they sell and rent.
"CAT's all about manufacturing and then selling big-ticket items, which is inherently a lot more risky," he said.
All in all, Cramer found United Rentals, the stock and the company, to be a much more attractive play than Caterpillar.
Shares of United Rentals trade at just 12 times this year's earnings estimates while Caterpillar shares sell for 16 times. And although Caterpillar can grow faster, the risks, particularly the wild card of China, are piling up.
"Let me give you the bottom line on these two: Caterpillar is a great stock to own in a world where everything's hunky-dory, but we're in a more challenging environment now. Even if the Chinese never slap tariffs on Caterpillar's machinery, the very fact that they might be willing to do so is enough to hold back this stock, at least until we get some kind of resolution to the trade dispute," Cramer said.
"That's why I think United Rentals is the better buy here, and it's why its stock has been behaving so much better than CAT's for the past few months," he concluded. "I bet it continues to perform better, which is why you should swap out of CAT and into URI if you think that the president still wants to play hardball with the Chinese."