10 Ways to Cash In on the Shortage of Just About Everything
By Jack Hough
America’s chicken-sandwich war has the combatants scrambling for supplies.
Breast prices have doubled this year.
Chick-fil-A has run low on sauce.
Burger King has had pickle problems—jars, not cucumbers, are hard to come by.
An isolated supply squeeze?
Anyone who is building or remodeling a home, or buying or renting a car, or stocking up on pool chlorine or dog food, knows better.
In the land of plenty, there suddenly seems to be an everything shortage.
In February, when Mitch Hires ordered furniture for a second home he is building in the Florida Panhandle, he was told that delivery would probably be delayed until June.
Now, the estimate has slipped to August or September.
“There are things going on now I’ve never seen,” says Hires, who, as CEO of Construction Resources in Decatur, Ga., has supplied builders with flooring and fixtures for 25 years.
Hires says his own business is “in a good place, all things considered.”
Barely a year ago, he was planning for cash preservation and survival.
Now, he is challenged to keep up with demand.
Countertops are available, and there have been few hiccups in mirrors and shower doors, but workers are scarce, especially installers.
Even though he raised entry-level pay, Hires has struggled to increase his payroll, now 726, to his goal of closer to 800.
Garage door prices have spiked with the cost of steel and freight, but at least units can be found, unlike with major appliances, where shortages stretch from mass-market brands like Whirlpool and Frigidaire to luxury ones like Subzero and Wolf.
Hires has had to advise some builders, “It’s not really the range you picked, but we have one.
You need to take this.”
Investors are left wondering what it means.
If widespread shortages lead to prolonged, hot-running inflation, the Federal Reserve could contemplate raising interest rates, and the mere whiff of an expectation of a signal of that could hamper stocks.
After all, a decade of near-zero rates has helped plump up the S&P 500 index to about 22 times projected earnings, close to its highest level since the dot-com stock bubble.
But if supply bottlenecks ease, pent-up demand is satisfied, and economic growth returns to its prepandemic level of meh, rates are likely to remain at historic lows for longer and stock indexes could continue to shine.
Consider a third, more nuanced outcome.
The causes of today’s shortages are numerous, varied, and changing.
But one theme unites many of them.
Companies have spent decades fetishizing efficiency at the expense of investing in resilience.
Our digital, virtual, shared, asset-light, just-in-time economy has been wonderful for profit margins, but it has left many companies short on stuff—plants, equipment, and, in some cases, inventory.
This might soon change, grudgingly. Some bottlenecks will last well into next year.
Prices will surge this summer, but then moderate, if bond-market apathy is any guide.
The uptrend in wages could prove stickier, but most big companies that populate the S&P 500 should cope well enough, for two reasons.
First, automation and long-term productivity gains have reduced their wage exposure; it takes an average of barely two workers to generate $1 million in revenue today, versus eight in 1986.
Second, workers are also customers, and healthier wage inflation at the bottom has been a long time coming.
Stock indexes can climb past a summer fling with inflation, and perhaps even a gradual rise in bond yields.
Jonathan Golub, chief U.S. stock strategist at Credit Suisse, points out that stocks have lately risen on days when inflation and yield expectations have increased.
Meanwhile, earnings expectations have shot higher so quickly that even with the S&P 500 up 12% so far this year, its price/earnings ratio has fallen a smidgen.
“I actually think that valuations are not going to be an issue at all because the earnings are so good,” says Golub.
He predicts that the S&P 500 will end the year with a 22% gain, and cyclical stocks will extend a lead they have built since highly effective Covid-19 vaccines were announced in November.
BofA Research is predicting that companies will put part of their surging earnings to work by making up for past underspending on plants and equipment.
The average age of fixed assets has reached levels not seen since the 1960s.
Investors who are looking to top up their industrial exposure might want to focus on companies that sell machines and know-how for bolstering supply chains, such as Oshkosh (ticker: OSK) and XPO Logistics (XPO).
As for go-go growth stocks that have led gains in recent years but have stalled or swooned lately, resist buying ones with questionable cash flows now.
“All of the liquidity that’s been poured into the market has created a lot of development of new companies, but it’s also actually lessened the chance of failure for companies that probably should have failed,” says Ann Miletti, who oversees active stock strategies at Wells Fargo Asset Management.
The Pandemic Effect
To assign blame for shortages, give some one-off events a passing mention.
Remember the February polar vortex that brought record low temperatures?
It shut down Texas petrochemical plants, drying up supplies of little-noticed but crucial goods, like the preferred resin for holding together compressed wood strands to make siding for houses.
Hurricane Laura last August set off a Louisiana factory fire from which chlorine production hasn’t fully recovered.
This year, uncooperative weather in Brazil and the American Midwest have added to a run-up in corn.
Move on to some obvious pandemic effects, and some less-obvious ones.
Time spent at home has fueled demand for bicycles, both stationary and mobile.
A theorized pandemic baby boom never occurred, but a puppy spree did, and it set off a run on kibble.
Hog farmers and processors are still recovering from last year’s Covid-19 plant closures, just as vaccines and a shift toward outdoor eating point toward a big year for grilling hot dogs.
Some goods have recovered from one bottleneck but look vulnerable to another.
A toilet paper shortfall early in the pandemic came as manufacturers recalibrated to package fewer rolls for restaurants and offices, and more for grocery stores.
Hoarding didn’t help.
Now rolls are plentiful, but there is a shortage of shipping vessels that threatens to disrupt the flow of wood pulp to make them.
Transportation kinks are many and far-reaching.
Shipping containers that carry most of the world’s goods are suddenly difficult to secure, but at the same time, Daniel Miranda, president of the Longshore and Warehouse Local 94 union that works two massive California ports, sees too many of them.
“Your goods are on the dock, but who’s going to pick them up?” he says.
“If you don’t believe me, I’ll take you to L.A., Long Beach, and you can see them stacked eight high.”
The dock backup, says Evercore ISI transportation analyst Jonathan Chappel, has been caused at times by too few chassis used by trucks to pull containers, too little warehouse space, too few warehouse workers, and tight conditions in rail service.
There are also ripple effects from shortages of key components.
Apple (AAPL) says that semiconductor scarcity will hold back iPad and Mac production and cost $3 billion to $4 billion in forgone revenue this quarter.
Ford Motor (F) says that problems securing chips will subtract $2.5 billion from operating earnings this year, and General Motors (GM) says $1.5 billion to $2 billion.
Of course, many supply shortfalls are due to producers simply guessing too low on demand.
Early in the pandemic, lumber yards stopped ordering from sawmills, because who in their right mind would want to build during a pandemic?
Seemingly everyone, it turns out, and sawmills are struggling to catch up.
The demand surprise, in turn, has been fueled by the wealth effect of a soaring stock market, and a shift in consumption from travel and entertainment to goods.
Government relief payments have eased hardship for individuals, but in aggregate, they have probably contributed to demand outstripping supply.
“The level of the stimulus appears to be bigger than the size of the problem,” says Credit Suisse’s Golub.
The Everything Shortage
From pickles to pool chlorine, Jack looks into why so many goods are in short supply.
These are recent effects.
There is one that has been taking hold since decades before the pandemic.
Just-in-time manufacturing, developed by Toyota in the 1970s and gradually adopted by companies around the world, has freed up capital and boosted profit margins and shareholder returns.
There are many variations on the approach, with names like continuous-flow and short-cycle manufacturing, or simply lean manufacturing, and modern supply chain software and tracking technology have taken efficiency to new heights.
Miranda, the Longshore union president, recalls how shoppers used to ask store clerks whether they have more inventory in the back.
Today, inventory is stacked on the sales floor.
Shipping containers serve as warehouses.
This works well enough under normal conditions, or even moderate shocks, when manufacturers can always switch goods from ships to costlier planes to get caught up on orders.
But the pandemic and, before it, a trade war between the U.S. and China, have exposed risks in focusing too narrowly on efficiency.
Supply-chain managers now talk about shifting from a just-in-time approach to a just-in-case one.
In a survey last year published by the Council of Supply Chain Management Professionals, 42% said that supply chains had gotten too lean.
Fixes for that include bringing manufacturing closer to customers, and bolstering inventories, which will require more warehouse space.
Intel is spending $20 billion to build two new U.S. chip plants.
GM and its Korean joint-venture partner LG Chem are building a second battery factory in Tennessee for $2.3 billion.
U.S. warehouse construction starts will climb 8% this year to a record $33.2 billion, according to Dodge Data & Analytics, a market forecaster.
Valuations for many industrial stocks appear elevated, but that is justified by a cycle that is in the early stages of recovery, with upward revisions to earnings estimates likely, according to the industrial analysts at KeyBanc Capital Markets.
“We think ongoing supply chain challenges could spur long-term investment for more outsourced design, engineering, and manufacturing capabilities, as well as increased utilization of robotics, automation, and [the industrial Internet of Things],” they wrote in a recent report.
One of their stock picks is Oshkosh, a maker of aerial work platforms and specialty trucks including cement mixers, which trades at 17 times projected earnings.
Another is Wesco International (WCC), at 14 times earnings, whose activities include supplying electrical and automation equipment for capital projects.
Analysts at Credit Suisse say that the warehouse automation market will double by 2026, even as the pandemic fades and consumers return to spending more on experiences.
Their top stock picks tied to that theme are XPO Logistics, at 22 times earnings, and a pair of industrial conglomerates: Honeywell International (HON), at 27 times, and Germany’s Siemens (SIEGY), at 18 times.
BofA has recommended companies whose sales respond quickly to spending on nonresidential fixed assets.
Historically, those have included Lam Research (LRCX), 24 times earnings; smart factory supplier Rockwell Automation (ROK), 27 times; Deere (DE), 19 times; and Caterpillar (CAT), 23 times.
Transportation is tricky, because desperate customers have sent prices multiplying and stock valuations ballooning, says Evercore’s Chappell.
He favors a segment of the trucking market called less-than-truckload, which consolidates small batches of freight at terminals, and enjoys relatively high barriers to entry.
LTL customers are largely industrial, and demand from them is still catching up to consumer demand, says Chappell.
His top picks, Old Dominion Freight Line (ODFL), at 32 times earnings, and Saia (SAIA), at 30 times, might give value investors pause, but he’s comforted that new data points continue to send earnings estimates higher.
“I Need a Subzero”
When will shortages clear?
Chappell says that back in March he would have said by summer, but now it appears that supply chains will remain stretched going into the holiday shopping season, which means the first opportunity they will have to recover might be early next year.
Golub at Credit Suisse guesses more than two to three months but less than two to three years.
Back at Construction Resources in Georgia, Hires wonders if last year’s toilet paper mentality, where shoppers pulled forward purchases of rolls, is taking hold in appliances.
Luxury and custom builders have begun placing orders when they break ground on a house, something that his appliance company has never seen.
Manufacturer order backlogs continue to grow.
“I have people from all over the country call me: ‘Hey, I’m in Texas.
I went to college with you. Remember me?
I need a Subzero,” he says.
“And I’m like, ‘I can’t help you.’ ”
Hires is grateful for the demand, and confident he can work through the shortages.
“It’s about transparency and honesty,” he says.
“If we do that, we’re going to be fine.”
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