Barron’s Weekend Summary: Ten ways for investors to play the inventory shortages that are causing bottlenecks in the economy
* Cover story: If widespread inventory shortages—which are the result of several factors—lead to prolonged inflation, the Federal Reserve could raise interest rates, denting stocks, but if supply bottlenecks ease, pent-up demand is satisfied and economic growth returns to modest pre-pandemic levels, rates are likely to remain at historic lows for longer and stock indexes could continue to shine; Ten industrial stocks are helping ease bottlenecks in the economy, and offer investors a way to play the shortages (positive on CAT, DE, HON, ODFL, OSK, ROK, SAIA, SIEGY, WCC, XPO).
* Tech Trader: Positive on AMZN: MGM Holdings doesn’t own a particularly compelling set of assets, aside from the James Bond films, but there are merits to the retailer’s acquisition of it—the deal locks up access to some old but familiar content at a time when that’s getting harder to do, and shows from MGM’s TV production arm, which produces series for DIS, Comcast, and others, could eventually be shown on Amazon Prime.
* Trader: Positive on AXTA: The company—along with PPG, Nippon Paint Holdings, and Akzo Nobel—controls the global industrial coatings industry, has the widest profit margins, is the leader in the refinish niche of the sector, and with aggressive expansion plans should see growth accelerate in the coming years; Positive on DG: The company and rival DLTR’s earnings reports beat expectations, but Dollar Tree’s warning the freight costs could have a big impact on earnings make Dollar General the stronger operator, a position it’s likely to hold for some time; “Valuations aside, many cyclical and value stocks coming off a nightmarish 2020 are in a position to show faster earnings growth in 2021 than the relatively pandemic-insulated software and technology sectors, which face tougher comparisons.”
* Profile: John Porter, lead portfolio manager of the $4.8B BNY Mellon Small/Mid Cap Growth fund, identifies long-term investment opportunities while eliminating fads; His team prioritizes high-quality businesses with organic top-line growth and the potential for continued, long-term high growth whose stocks the fund can hold for years, and applies a “four M model”—management, moat, market size, and business model—to narrow down candidates (top 10 holdings: TWLO, PTON, SQ, BAND, LYFT, HUBS, PFPT, PLNT, ONEM, HZNP).
* Interview: Daniel Kahneman, who won the Nobel Prize in Economics in 2002, says “noise” is the most common cause of bad decision-making—and that the wide dispersion of “correct” answers, and the amount of noise among so-called professionals in finance, medicine, and elsewhere, is nothing short of alarming.
* Features: 1) Positive on ASML, AMAT, LRCX: Amid a growing shortage of semiconductors—a problem mentioned this year at 275 public company events, mainly earnings calls, up from one in 2020—should benefit the companies that supply chip makers and will help the industry catch up; 2) Positive on MLHR: With half of US adults fully vaccinated, many companies are making plans to get people back in the office, which should boost sales of chairs, sofas, desks, and other seating; The company, which owns retail chain Design Within Reach, is expanding in this area with the acquisition of KNL; 3) Positive on EQT: The nation’s largest producer of natural gas is a disciplined company that projects a free cash flow yield of more than 10 percent next year—and with higher natural gas prices, up 15 percent this year, the company stands to benefit, as it accounts for some five percent of total US output; 4) Positive on PLNT: The health and fitness chain has experienced a strong recovery, and none of its franchise or company-owned gyms were put out of business by the pandemic, and while some analysts are skeptical about whether members will return, bulls are betting they will, and that the home-fitness trend won’t pose a long-term problem; 5) Positive on XOM, CVX, Royal Dutch Shell: Big Oil suffered a triple setback last week after shareholders pushing for shifts to greener energy made gains and a Dutch court ordered Shell to slash carbon emissions, but the defeat could move the industry forward in ways that will benefit energy companies and their shareholders.
* European Trader: Positive on Next: The British fashion giant has long been a solid performer and has expanded its customer base by selling its own brand designs through its shops and e-commerce—and a range of new initiatives could push the share price even higher.
* Emerging Markets: China can’t quite command world metals prices, but it can certainly slow down the new commodities supercycle many investors are counting on—net long positions on commodities of all types are at a 25-year high globally, and developments in Beijing could mean a lot of those bulls get burned.
* Commodities: “Silver hasn’t kept pace as other commodities have reached record highs—and about the only consolation is that silver has topped an even smaller rise by gold”; The metal could reach “higher highs and higher lows in the coming years,” says Michael Cuggino of the Permanent Portfolio Family of Funds.
* Streetwise: SPAC sponsors get paid in stock, and SPAC targets get a low-hassle stock listing, but for ordinary investors the benefits may not be worth it, says columnist Jack Hough—though some experts say they aren’t really destroying shareholder value.