This summer is going to be unlike any we’ve seen before. There will be shortages of all kinds of products. These shortages will hurt many companies. However, some will benefit from all the chaos. I’ve found seven stocks to play the coming shortages.
But before I get into the seven stocks in question, I’d like you to Google the phrase “supply chain shortages.” You’ll find no shortage (pardon the pun) of stories discussing the impending problems.
Right in the top stories section, I see car buyers, gamers, chicken lovers, are likely to all suffer from the supply shortages caused by Covid-19.
“Twenty or 30 years back you had three or maybe four layers in supply chains. We have so many more layers that it is not clear we are adding to viability. We could have more bottlenecks and more chaos than before,” stated Paddy Padmanabhan of the Insead Emerging Market Institute in Singapore.
The reality is that Covid-19 exposed a lot of gaps in the global supply chain that aren’t going to be solved overnight. This means it makes sense to review your portfolio to see if any holdings will be affected long-term by the latest shortages.
In the meantime, some of these stocks could be replacements for holdings that shortages will hit.
- TrueBlue (NYSE:TBI)
- Kinaxis (OTCMKTS:KXSCF)
- Tyson Foods (NYSE:TSN)
- Pool Corporation (NASDAQ:POOL)
- Kraft Heinz (NASDAQ:KHC)
- West Fraser Timber (NYSE:WFG)
- Freeport-McMoRan (NYSE:FCX)
Supply Chain Stocks to Buy: TrueBlue (TBI)
The labor shortages created by generous unemployment benefits that keep fast-food workers at home are bound to cause problems with hospitality this coming summer. Staffing solutions are TrueBlue’s bread and butter. It’s so bad that McDonald’s (NYSE:MCD) franchisees believe the situation is going to lead to a price hike in the Big Mac.
“Price increases are happening everywhere you look and will continue as employers pass along these added costs. We will do the same. A Big Mac will get more expensive,” stated the National Owners Association in a letter to franchisees.
Of course, TrueBlue’s specialty brands, such as People Ready, deal in areas outside the restaurant industry. However, it connected 490,000 people to work in 2020. Regardless of the industry, shortages are still likely, and while it will make the job tougher for TrueBlue, it also presents an opportunity.
From a TBI stock investing standpoint, the fact that the company has $122.8 million in trailing 12-month free cash flow (FCF), FCF yield of 12.7% ($122.8 million divided by market capitalization of $963.7 million) and very little debt, makes it an excellent long-term bet as well.
Its long-term performance is abysmal — a 10-year annualized return of 6.5%, less than half the U.S. markets as a whole — but reversion to the mean should help boost its fortunes in the years ahead.
Who better to help with a supply chain disaster than a company whose software was created specifically to help businesses organize their supply chain and sales operations. Its software should remain in demand for the foreseeable future. That’s excellent news for Kinaxis shareholders.
Since the beginning of the pandemic, its shares have lost 40% of their value. Year-to-date through May 14, they’re down around 20%. Given its annualized total return over the past five years is 25.2%, shareholders can’t be happy with recent results.
Kinaxis reported Q1 2021 results on May 4 and they included a 9% increase in overall revenue to $57.7 million with its software-as-a-service (SaaS) up 19% year-over-year to $40.6 million.
On the bottom line, it generated adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $9.0 million, down 40% from Q1 2020.
But fear not.
The company’s guidance for the full year anticipates sales of at least $242 million, SaaS growth of at least 17% and EBITDA margins between 11-14%. Down the road, it expects SaaS growth to pick up to between 23-25%.
The company’s backlog currently sits at around $384 million. And while Covid has made its life more difficult, it sees business improvement throughout 2021.
KXSCF stock might be in a funk, but the company and its RapidResponse software aren’t.
Tyson Foods (TSN)
Just like every company that’s expected to benefit from supply shortages, Tyson Foods will have to jump through many hoops to make that happen. Yes, they might be able to raise prices, but costs are almost certainly going to be higher to meet the demand opportunity.
In Tyson’s case, it’s got an even tougher assignment because it made a bad call on the type of male hen used, which reduced the hatch rates and the number of eggs produced. Switching back will take some time, and I imagine money, to get up to speed. Add to that a lost week from the Texas winter storm in February, and Tyson’s got its work cut out for it.
I do not doubt that the food mega-processor will overcome the current challenges to meet the higher demand for chicken sandwiches.
“Demand for the new sandwich has been so strong that, coupled with general tightening in domestic chicken supply, our main challenge has been keeping up with that demand,” David Gibbs, CEO of KFC’s parent company, Yum Brands, told TSN stock analysts on a conference call last month.
As the old saying goes, “Opportunity is missed by most people because it is dressed in overalls and looks like work.”
Pool Corporation (POOL)
Like every year around this time, swimming pools across the country are getting prepared for summer fun, frivolity and a nice cool off from the warm weather. As one of the largest distributors of swimming pool supplies, Pool Corporation loves this time of year.
Thanks to Covid-19, the pent-up desire to enjoy a nice dip in the pool has resulted in a major run on pool supplies such as chlorine. Intuitively, you might think that the better bet would be a chlorine manufacturer such as Olin (NYSE:OLN), the number-one global supplier of chlor alkali products. You would not be wrong.
However, in my opinion, chlorine tablets are less of a discretionary item than you might think. Pools have to be maintained for a variety of reasons, including the saleability of one’s home. As the world reopens, people are going to want to hold pool parties in their backyard.
And while Pool will have to do a good job of controlling its inventory, higher prices should not be a problem, given most people who own a pool have likely saved plenty over the past year to afford any increases easily.
As for POOL stock itself — the 10-year annualized total return of almost 31% compared to 8.5% for Olin — its results speak for themselves. You can’t go wrong owning its stock over the long haul.
Kraft Heinz (KHC)
Two years ago, you wouldn’t have caught me recommending the food producer. However, times have changed. Kraft Heinz is starting to grow again.
In April, media outlets across the country reported a shortage of ketchup packets resulting in a 13% increase in their price since January 2020. Multiply that little squeezable packet by billions and you have the opportunity for a significant bump in revenue.
It got so bad that restaurants considered ditching Heinz’s ketchup for alternative suppliers. Here in Canada, I immediately think of French’s. A&W Restaurants has used it since 2016 instead of Heinz.
That’s because it has nearly 70% ketchup market share in the U.S., and it made moves at the beginning of the pandemic to be prepared for the extra demand.
“We made strategic manufacturing investments at the start of the pandemic to keep up with the surge in demand for ketchup packets driven by the accelerated delivery and take-out trends,” Steve Cornell, Kraft Heinz’s president of enhancers, specialty and away-from-home business unit, told CNN.
Kraft Heinz shareholders are benefiting. YTD, KHC stock is up 27.6%, extending the 57.9% increase over the past 52 weeks.
West Fraser Timber (WFG)
How bad is the lumber shortage? Fortune recently explained the shortage in eight charts. Two reasons are a significant increase in do-it-yourselfers and historically low-interest rates that have increased purchases of new homes and new home construction.
Lumber producers like West Fraser Timber can’t keep up with the demand. The imbalance in supply and demand forces has resulted in a 308% increase in lumber prices since the beginning of the pandemic. Between January 2017 and March 2020, the lumber price per thousand board feet remained slightly above or below $400. Today, it’s over $1,400.
According to Forisk Consulting, West Fraser has the second-largest capacity of softwood lumber production in the U.S. with 3.28 billion board feet. That’s only behind Weyerhaeuser (NYSE:WY), with 4.3 billion board feet of capacity.
Things had gotten so ahead of themselves that Brookfield Asset Management (NYSE:BAM), one of my favorite asset management companies, recently sold $1.25 billion of West Fraser stock that it got when the company acquired Norbord in early February in an all-stock transaction.
YTD, WFG stock is up 22.7%, extending the 52-week gain to 212.9%. Those who don’t think it can keep moving higher should consider that some believe higher prices will remain in place for another eight-14 months, providing higher earnings for at least a few more quarters.
They say copper is the new gold. Attendees at BMO’s Global Metals & Mining conference earlier this year were in near-unanimous agreement that copper would be the metal to see the most growth between 2021 and 2025. That’s music to the ears of Freeport-McMoRan investors.
Between house construction, electric vehicles, and all the other reasons for increased demand for copper, it’s no wonder that copper prices are hitting all-time highs. Freeport CEO Richard Adkerson noted in April that it puts his company in a strong position in the days ahead.
“The combination of rising demand, scarcity of new supplies point to large impending structural deficits, supporting much higher copper prices than previously anticipated,” Adkerson told investors on an April conference call following the group’s Q1 earnings.
This is a company “notably well positioned to benefit from these fundamentals” as it is “a leading responsible large-scale producer of copper with near-term and longer-term growth embedded in our portfolio,” he said.
As a result of this perfect storm, FCX stock gained 14.5% in April alone. YTD, it’s up 61.6% and more than four-fold over the past 12 months. If you think it’s too late and you’ve missed your opportunity, it still only has an FCF yield of 3.9% (TTM FCF of $2.41 billion divided by $$61.96 billion market cap).
If you want to invest in commodities to ride the inflation wave, you could do a lot worse than buying a copper producer.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.