How Stock Investors Can Play the Supply Chain Snarl

JPM has a list of companies it says are holding up and should be ready to rock later.

The optics, as they say on Wall Street, aren’t good for the massive dysfunction that goes by the name of the supply chain bottleneck: hundreds of container ships lolling offshore, empty store shelves, appliance delivery times stretching far into the future.

Fear not, however. JPMorgan spies an end in sight to the supply snags. The disruptions should fade away in next year’s first half, the bank believes.

And, to the Wall Street giant, that means now is a great contrarian time to buy supply chain-susceptible stocks, on the order of chemical producer Celanese (its stock is flat since spring), home products maker Newell Brands (down since then), industrial tool company WW Grainger (flat), and clothier Ralph Lauren (down). In fundamental terms, if not always in share price ones, these all are bearing up despite the supply problems, JPM finds. And now is also perfect to invest in the father of them all, the S&P 500 index, the bank contends.

For instance, despite having to charge more for its products, owing to higher energy costs, Celanese has been able to maintain stable earnings and revenue. Ralph Lauren has logged strong sales and market share increases this year, after 2020’s doldrums, when its stories were shuttered. The apparel maker, known for its timeless styles, has proven that its goods have an appeal that remains strong both in the US and abroad, analysts say. Meanwhile, the S&P 500, while dipping Tuesday, has managed to set record after record in 2021, up about 25%.

And all the better once the supply kinks get fixed, the thinking goes. JPM discerns early signs of that. “Global supply chain pressures are easing—if this persists, S&P 500 should continue to deliver strong revenue growth and record margins,” said Dubravko Lakos-Bujas, JPM’s chief US equity strategist, in remarks to CNBC. The pandemic’s retreat (at least for the moment) is a big source of encouragement, he said, adding, “Our view all along has been that supply and labor shortages would be temporary and normalize with a decline in COVID-19.”

Lakos-Bujas pointed to the boffo financial reports for the third quarter and asked how these could be possible if the supply situation was as dire as the doom-meisters say. Indeed, S&P 500 companies have logged earnings growth of 32.7% and revenue increases of 15.3%. For the year’s final period, analysts are projecting earnings up 22.4% and revenue ahead 11.9%, according to FactSet.

His boss, JPM CEO Jamie Dimon, is even more optimistic. “This will not be an issue next year at all,” he told an investment conference last month. “This is the worst part of it. I think great market systems will adjust for it like companies have.” For the record, that’s also the outlook of Federal Reserve Chair Jerome Powell.

This sunny viewpoint, of course, isn’t universally shared. Moody’s Analytics warns of “dark clouds ahead” for the global supply chain, as no clear solution is at hand to work out its snarled pieces worldwide.

Plus, the Institute for Supply Management (ISM) sees an ongoing problem with no clear end in sight. The ISM declared in a report that “companies and suppliers continue to deal with an unprecedented number of hurdles to meet increasing demand.”

By the ISM’s reckoning, the auto industry is suffering the most, largely because of the global semiconductor shortage. Transportation manufacturers told the ISM in its survey that missing chips have “stopped or limited the lower-margin vehicle production schedules,” with the semiconductors routed to more expensive autos.

Computer makers are experiencing “extreme delays” and “getting anything from China is near impossible,” the trade group said. Demand for electronic goods and appliances has “remained strong,” but production continues “to be held back by supply chain issues.”

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