The Russia/Ukraine conflict will worsen food inflation … the type of stock that Louis Navellier sees prospering in this environment … watch this back-burner Russia problem

 

The Russian invasion into Ukraine is going to accelerate inflation.

Clearly, this is troublesome for your monthly budget. But with the right positioning, it could actually provide a tailwind for your portfolio.

To help us clarify this distinction, let’s turn to legendary investor, Louis Navellier, and his recent Special Market Podcast for his Accelerated Profits subscribers.

From Louis:

Ukraine, of course, is the breadbasket of Europe. I believe they grow one-third of the world’s wheat, twenty percent of the world’s corn, and eight percent of the world’s sunflower oil.

Because it’s such a fertile country and a great agricultural area, obviously this is going to be disruptive. We’re going to have food inflation along with energy inflation.

On that “energy inflation” note, I’ll quickly add that West Texas Intermediate oil has just hit a seven-year high, breaking $102 a barrel. But let’s return to the food issue.

Here’s more from The Wall Street Journal on the scope of this food inflation problem:

Rising food prices are emerging as a significant headwind to the economic recovery from the pandemic this year…

Russia’s invasion of Ukraine could make those headwinds even stronger.

The price of basic staples such as wheat, corn and soybeans rose steeply last year, which would translate into higher grocery prices world-wide this year, economists said.

Consumer food prices tend to lag behind commodity prices by several months. Even if food commodity inflation slows, as many forecasters expect, households will still face higher grocery bills in the months ahead.

John Allan, the chairman of Tesco PLC, Britain’s largest supermarket chain, told the BBC earlier this month that “the worst is yet to come” for food inflation.

The chart below provides a snapshot of just how expensive food has become over the last two years. And this is despite a decrease in cost in 2020.

Back to The Wall Street Journal:

That will both aggravate inflation in many countries, and could slow economic output as consumers cut spending on other goods to accommodate higher outlays for food.

Many central banks including the Federal Reserve plan to raise interest rates, or have already done so, because of high inflation to date. Escalating food costs could add pressure to raise them even more, further curbing growth.

Clearly, higher food prices are a headwind for your monthly budget. Meanwhile, the Fed raising rates to curb inflation has the potential to hurt certain sectors of the stock market.

So, where’s the investment silver lining in this?

***The type of stock that performs well in an inflationary, rising rate environment

Big-money Wall Street traders that have the ability to move markets typically don’t pull their capital completely out of the market, even in volatile times.

After all, they’re accountable to their investors for returns, so sitting on a big chunk of cash for a long time can make their performance look poor relative to their Wall Street competition.

Instead, traders reallocate their capital within the market, moving from out-of-favor sectors into those sectors that appear best positioned to handle current economic conditions.

Today, we have a problem with inflation. So, companies are seeing higher input costs, which erodes their bottom lines.

Higher costs also threaten to slow consumer spending. After all, when prices get too high and shoppers don’t have the income to support them, they stop opening up their wallets.

Finally, with the Fed hiking rates, that could be a headwind for economic growth.

So, the type of company that thrives in this environment is pretty straightforward…

It’s a company with pricing power, meaning it can pass along higher input costs to consumers and maintain its profit margin. And it’s maintaining healthy growth numbers, benefiting from robust demand despite higher costs.

***This is exactly where Louis is looking today

From his podcast:

Any company that can raise prices, has good earnings, and has good guidance is an oasis.

Louis points toward examples from his portfolios, including Levi Strauss (LEVI), Tyson Foods (TSN), various energy stocks, and a handful of semiconductor companies featuring record order backlogs.

To get a sense of this relative outperformance visually, let’s look at SYLD, which is the Cambria Shareholder Yield ETF. It’s engineered to find companies that are returning the most value to shareholders through dividend increases, share buybacks, and debt reduction. It’s a proxy for our stocks that can raise prices while maintaining solid growth.

We’ll compare this to the S&P 500, as well as XLK, which is the Technology Select ETF from SPDR. It’s a proxy for tech-heavy growth stocks.

As you can see, here in 2022, while the S&P is down 9%, and XLK is down 12%, SYLD is down just 2%, as traders have rotated into this corner of the market.

And keep in mind, these are broad ETFs. Some individual stocks have performed far better.

For example, Tyson Foods, which Louis referenced, is up 7% in 2022. It’s poised for even more growth over the coming quarters.

***If you’re looking for help in finding specific companies likely to thrive in this market, look at Louis’ quant-based algorithms

Louis’ podcast was recorded for his Accelerated Profits subscribers. But it included something that’s interesting for anyone looking for help in finding this type of fundamentally-strong stock for their portfolio:

We’ve just updated the testing of our models, and our fundamental models are working better in the past year than they have in the past three years.

In the past three years, there’s been a lot of froth and speculation in the market. Our fundamental models don’t pick up those kinds of stocks. But the market has now actually come my way.

…the market is very focused. It’s getting more narrow. So, I can buy fewer stocks, and there’s a very clear, critical path silver lining.

That silver lining path is what we’ve been discussing today – fundamentally-superior stocks that can raise prices and maintain solid earnings growth despite what could be challenging macroeconomic conditions.

Last week, Louis held a live, special event in which he walked through the details of his computer models and this quantitative approach to the markets. If you missed it, you can watch a free replay by clicking here.

***One Russia-related problem to keep your eye on

Russia’s invasion into Ukraine will impact food prices and global energy prices. But what’s not being discussed is the risk of greater disruptions to the semiconductor supply chain.

To make sure we’re all on the same page, semiconductor materials can conduct electricity under certain conditions. This makes them great mediums for controlling electric currents. And that makes semiconductor chips a critical component of virtually every electronic device with an on/off switch.

Basically, semiconductors are a “must have” in any technology product. Our world would be unrecognizable today without them.

You’ve likely read about the semiconductor shortage that’s plaguing manufacturers today. Well, it turns out the Russian attack on Ukraine could exacerbate this shortage.

Neon gas and palladium are important in the manufacturing of semiconductor chips. And Russia is a big supplier of both.

From The Wall Street Journal:

Russia and Ukraine produce 40% to 50% of semiconductor-grade neon, according to market-research firm Techcet CA LLC. Largely derived from steel manufacturing, neon gas is used in lasers that help in the design of semiconductors.

Approximately 37% of the world’s palladium production comes from Russian mines, according to Techcet, and the metal is used in sensor chips and certain types of computing memory.

A prolonged war could cause delays in shipping, driving up prices and pushing manufacturers to seek other sources of supply…

While other countries, including the U.S., have the capacity to produce neon, ramping up production could be difficult, said Stacy Rasgon, senior analyst at AllianceBernstein Holding LP’s Bernstein Research.

Up to 75% of the world’s supply of neon is likely used to make semiconductors, according to Bernstein.

As of now, this isn’t something to lose sleep over. But if the Russia/Ukraine conflict drags out, it could turn into a bigger issue.

It also underscores the importance of factoring issues like this into your stock selection process, which is something that Louis’ computer systems do.

They analyze millions of data points and correlations – it’s a level of analysis far beyond what’s practical for an average investor to try to compute.

In this case, the question could be: “How exposed is a specific semiconductor stock to Russia-supplied materials?” The answer could make a big difference in returns.

Again, to learn more about Louis’ quant approach, just click here to view his recent presentation.

Have a good evening,

Jeff Remsburg