Before the invasion of Ukraine, 2022 had started in the same way that 2021 ended: With snarled supply chains affecting society and the economy. The products we consume reach us through a complex chain that we likely didn’t consider as much a year or two ago. It starts with manufacturers that send their goods to logistics firms. Those logistics firms store and distribute those goods to retailers via a complex transportation system. And those retailers sell those goods to you and me.
That chain was disrupted by a variety of forces, but most prominently by the pandemic. Lockdowns choked off vital parts of the supply chain and products could no longer flow as they did prior.
Business also became more challenging. International trade barriers continue to come down and this increases the complexity of supply chains. On top of those pressures, there is pressure on supply chains to reduce their environmental impact.
We see these effects most evidently in semiconductors, electric-vehicle battery components, grocery prices and coffee to name a few. That leaves investors wondering which firms can adapt best because those firms have a distinct advantage and these seven make our list:
- Pepsi (NASDAQ:PEP)
- Costco (NYSE:COST)
- Hewlett Packard Enterprise (NYSE:HPE)
- Weyerhaeuser (NYSE:WY)
- Qualcomm (NASDAQ:QCOM)
- Taiwan Semiconductor Manufacturing (NYSE:TSM)
- General Motors (NYSE:GM)
Supply Chain Stocks to Buy: Pepsi (PEP)
It is becoming clear that Pepsi could survive the supply chain troubles unscathed based on recent earnings. The reason that the soft drink and snack giant could do so is not that it has been immune to price increases that are affecting consumer packaged goods producers in general. The Purchase, NY-based firm is also feeling the squeeze of higher commodity and transportation costs. The company recognized a 7% increase in prices in its Q4 earnings.
But it was able to report an 11.9% increase in organic revenues at the same time. The reason that Pepsi is operating so well in a tight supply chain environment in which inflation is high is simple: The company can pass on higher prices to consumers. Pepsi chief executive Ramon Laguarta noted as much when questioned about the strong results, “We have consumers following us in spite of higher prices.”
Pepsi hasn’t gone without its struggles. Operating profits did fall 9% during Q4. But overall Pepsi reported an 11% increase in operating profits throughout 2021. Revenues increased by 13% over the year as well. As long as Pepsi produces products consumers want it may be able to squeeze more revenue from them. That should insulate it against broader inflationary factors.
Its decision to stop doing business in Russia has hit PEP stock this week, as that country is its second-largest international market after Mexico. Barron’s noted last week that Cowen analyst Vivien Azer advised clients that “the supply chain in Russia and Ukraine is local, which should insulate local currency results.”
Investing in Costco simply makes a lot of sense as inflation rates continue to cause concern. Consumers are feeling the effects of January’s 7.5% reported inflation. Prices of groceries have been highly affected.
According to the Bureau of Labor Statistics “Higher costs for labor, freight and ingredients are reflected in rising prices, food industry executives said, so nearly all food is affected. The prices of meat, fish and eggs have risen the most, increasing 12.2% over the past year.”
That’s very concerning and it doesn’t appear to be slowing soon. A report by IRI back in December predicted that grocery prices will rise 5% in the first half of 2022. Again, more bad news that increases consumer living expenses.
But higher grocery prices are causing consumers to seek ways to lower their grocery bills. That’s a direct boon to Costco. It is plainly evident in the numbers the company recently released for Q2 and the year-to-date. Through the first 24 weeks of 2022 Costco topped $100 billion in sales, up from $86.235 billion during the same period in 2021. That has resulted in net income and EPS figures rising in kind and makes COST stock worth a serious look.
Supply Chain Stocks to Buy: Hewlett Packard Enterprise (HPE)
Hewlett Packard Enterprise topped earnings estimates with its first-quarter results. It didn’t matter that the networking equipment, computer server, and data storage company missed revenue numbers slightly. The market is more concerned with the fact that the company posted 53 cent EPS figures, beating the 46 cents expected, than the fact that its $7 billion in revenues was just short of the $7.01 anticipated.
The suggestion here is that Hewlett Packard Enterprise is navigating the tough supply chain landscape better than its competitors.
Part of the reason the tech maker is doing better is that it is shifting to a more “as-a-service” business. Its subscription basis orders are up 136% from a year ago. That certainly reduces costs as the company ships less hardware and sells more subscriptions. Digital products simply don’t face supply chain issues.
Weyerhaeuser is the next stock on this list of companies that should survive the supply chain disrupting relatively better than others. The company was founded back in 1900 and manufactures, sells, and distributes timber products.
There is currently a house construction boom occurring in the U.S. Construction of two housing types, apartments and single-family homes, have risen by 13% and 22%, respectively. While the article I linked to says the boom isn’t helping certain demographics get into their first home, it is helping Weyerhaeuser.
It reported record full-year net earnings of $2.6 billion. The company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) increased 86% during the year, reaching a record $4.1 billion.
Back in mid-2021 Weyerhaeuser CEO Devin Stockfish predicted that the building boom could result in strong wood demand for the upcoming decade. We are roughly nine months past that prediction, but early results seem to confirm what he was saying to be true.
Weyerhaeuser saw revenues increase 35.44% between 2020 and 2021. WY stock earnings skyrocketed from $1.07 per share to $3.47 during that same period. Strong building supply stocks like Weyerhaeuser are a logical choice in a time of snarled supply chains.
Supply Chain Stocks to Buy: Qualcomm (QCOM)
Chips are difficult to make and they’re even more difficult to make given supply chain challenges. That’s why Qualcomm makes a lot of sense right now. The semiconductor manufacturer which primarily serves the handset market recently surpassed Wall Street expectations. That’s always a positive, and particularly so this year as chip supply chains have been severely negatively affected.
CEO Cristiano Amon noted that demand continues to outstrip supply but that supply shortages are improving. Although he sees those issues persisting the company was able to report $10.7 billion in sales and $3.4 billion in net income in the recent quarter.
That outpaced Wall Street’s QCOM stock watchers’ expectations and continues to reinforce the idea that semiconductor stocks are strong bets in the current environment.
The company is seeking to develop markets outside of its core handset market. Handset sales increased by 42% for the firm in the recent quarter but it is still seeking to diversify its revenue streams into other semiconductor markets.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing is important for the same reason Qualcomm is important: Both firms are central to semiconductor supply chains. The difference is that Taiwan Semiconductor Manufacturing is even more important.
And the supply chain saga is affecting it in ways we couldn’t have predicted months ago. That’s because TSMC is central to the Russian invasion of Ukraine as it relates to semiconductors. It has been reported that “Russia is wholly dependent on TSMC for the high-end semiconductors required for the manufacture of anything from laptops and smartphones to equipment for the country’s military and security services.”
TSMC is halting its sales of semiconductors to Russia and the message is clear. The Taiwan-based firm wants China to be aware that it won’t tolerate increasing aggression which implies any sort of invasion of its home nation.
The TSM stock price has fallen in the wake of the Ukraine invasion. But I believe it will ultimately succeed because the forces of right and wrong will conspire to back TSM in cutting Russia off.
TSMC was already moving away from Russia as its needs weren’t congruent with its business. Now it can direct those efforts to more fruitful ventures.
Supply Chain Stocks to Buy: General Motors (GM)
The automotive industry has been as damaged as any by supply chain woes. In particular, chips required by General Motors and its peers are hard to come by
“Automakers large and small are still being affected by an acute lack of semiconductors, tiny components that are absolutely necessary, even in the most basic cars and trucks,” Cnet’s Roadshow noted last month.
Last year that meant GM had to offer vehicles without certain features because of the chip shortage. This year the company isn’t facing any downtime at its assembly plants due to shortages.
That implies that GM should be able to handle increased manufacturing requirements and complex chips required for its EVs. The company has an objective to deliver 400,000 EVs in North America by 2024.
That should result in higher valuations for GM stock. It depends on the company continuing to successfully navigate a complex supply chain environment.
On the date of publication, Alex Sirois 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.