The One Group Of Stocks That Could Ride Out Shortages, Inflation, And The Rest – No Matter How Long They Hang Around

The One Group Of Stocks That Could Ride Out Shortages, Inflation, And The Rest – No Matter How Long They Hang Around
Carl Hazeley

over 2 years ago5 mins

  • The major disruptions to US stock markets in recent months are likely to be short-term, including mooted tax hikes, worker shortages, and supply chain bottlenecks.

  • High input cost inflation is likely to be a longer-term disruption, though, and there’s a risk that rising coronavirus cases through winter could be too.

  • Either way, buying US stocks that are the most efficient in their respective sectors is a good way to set yourself up to benefit.

The major disruptions to US stock markets in recent months are likely to be short-term, including mooted tax hikes, worker shortages, and supply chain bottlenecks.

High input cost inflation is likely to be a longer-term disruption, though, and there’s a risk that rising coronavirus cases through winter could be too.

Either way, buying US stocks that are the most efficient in their respective sectors is a good way to set yourself up to benefit.

Mentioned in story

It’s been one piece of bad news after another for stock markets in the last few months, from tax hike proposals to supply chain shortages. But whether these issues hang around for the long term or short term – and it’s well worth looking at which is which – there’s a set of stocks you can invest in that should do right by you in any case.

Issue #1: Tax hikes

Details emerged last month that the US government is looking to hike corporate tax rates on income earned in the States and abroad. The proposal would knock 2022’s earnings growth by about five percentage points, weighing on stock prices.

Short or long-term?

Investors in prediction markets were pricing in a 62% chance of tax hikes, but that’s since dropped to 30%. In other words, a major US tax hike is unlikely to happen, making the issue short-term.

Issue #2: Input cost inflation

Rising wage costs and commodity prices have been a major focus for companies over the last few months. Inflation has come up in several earnings updates so far this season, and the Thomson Reuters/CoreCommodity CRB Index – which tracks the prices of key commodities – is up around 60% this year. Analysts are expecting profit margins for S&P 500 companies to have fallen by a full percentage point in the third quarter from the second.

Short or long-term?

There’s not much consensus about if and when high inflation will start to ease, but analysts appear to be baking still-high costs into their earnings forecasts for this quarter and for 2022, suggesting the issue of high inflation is long term.

Issue #3: Supply chain bottlenecks

The global collapse in demand we saw last year has now given way to a boom as major industries and countries try to recover – and the supply side of the equation largely hasn’t been able to keep up. That’s weighed on economic growth in some cases, and pushed the prices of things that are available even higher.

Short or long-term?

There are encouraging signs on this front: the Freightos Global Container Freight Index and the Drewry World Container Index show that shipping rates have declined from September peaks, suggesting supply chain bottlenecks could be a short-term issue.

Freight rates

Issue #4: Coronavirus

Coronavirus’s resurgence (yes, again) could delay an easing of supply chain bottlenecks and a fall in inflation to more manageable levels. Cases in the UK, for example, have jumped since the start of October, but stocks that tend to benefit from a reopened economy have underperformed all over the world.

UK covid cases

Short or long-term?

A rise in cases seems likely as the northern hemisphere’s winter sets in, but economists are expecting the economic impact to be limited. And if the recent strong performance of supply chain-exposed stocks is anything to go by, investors agree,. Overall, then, coronavirus will (hopefully) be a short-term issue from here on out.

Issue #5: Worker shortages

The US economy has added fewer jobs than expected for a few months in a row despite the high number of job vacancies. That goes to show how few workers there are to go around, which economists partly put down to fears of a pandemic that’s still running rampant. Understaffed businesses could lead to weaker economic growth, all else equal. And even those that can find people to join their teams have had to boost wages to one-up the competition, which could lead to lower profit growth.

Short or long-term?

How enduring this issue is depends on the companies: firms with cheaper labor in labor-intensive industries like leisure and hospitality will likely see this as a hiccup, while companies with higher staff costs may feel the pinch longer term. On the whole, though, economists believe the pandemic-driven worker shortages will ease later this year, making it a short-term issue.

What’s the opportunity here?

Input cost inflation, then, is the only issue facing markets that’s likely to be long-term, while tax hikes, coronavirus, worker shortages, and supply chain bottlenecks seem to be short-term disruptions.

But with open questions around precisely how short-term some of these phenomena may prove to be, there’s one strategy you can apply to stock-picking that should do well in this environment and through to the end of the year: buy the most efficient US companies’ stocks.

Here, I’m talking about efficiency measured in two ways: sales per employee and sales per dollar worth of assets. The reasoning is twofold. For one, the most efficient companies should have their profits hit the least if these disruptions keep sending revenues down and costs up. And if the disruptions dissipate altogether, the most efficient companies are still the best-placed to capitalize – as recent history has shown.

Efficient stocks' performance

Now, to put this strategy to work, you need to know which companies are the most efficient.

You could rank companies on absolute efficiency, pitting asset-heavy Dow Chemical against comparatively asset-light Apple. But I think there’s a smarter way to do this: look at the most efficient companies in a given sector and back those. See, capital is most likely to flow out of inefficient firms in a given sector and towards stocks of companies that’ll grow it most effectively, which could offer greater upside than simply buying the stocks investors already know are hyperefficient.

The table below, put together by Goldman Sachs shows exactly that. So to put this strategy into practice, I’d look at each of these companies carefully and see which – if any – look attractive from a valuation and earnings growth perspective right now.

GS efficient stocks
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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