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Supply chain woes offer investor opportunity

Firms involved in online purchases will do well this Christmas. Bricks and mortar retailers face inventory challenges.

Supply chain problems have upended the global economy, as sporadic Covid-19 outbreaks in Asia have closed factories and created labor shortages at cargo terminals which is delaying the shipment of goods.

As the all-important Christmas season approaches investors who own some well-known brands making shoes, apparel and fashion face a weak season. For firms, who source their products within North America it will probably be a better one. Companies that provide shipping services by road and air within North America may also benefit as freight rates rise. And for those who sell digital goods, such as video games and online entertainment, things also look good.

“Consumer demand has gone up at a rapid rate from last year, but that’s not the big part of the problem,” says Brooke Thackray, a research analyst with Horizons ETFs Management (Canada) Inc.  “It’s more on the supply and logistics side. We now realize how fragile that system is. The implication for Christmas is that some of the goods aren’t going to get here.”

When it comes to holiday shopping, it is the early bird who will get the goods this year. Some things will be in short supply and there will likely be fewer choices and higher prices. There will be slim pickings for shoppers who leave it too late, adds Mr. Thackray, who is part of the Horizons Seasonal Rotation ETF (TSX:HAC) team. 

Brooke Thackray is a research analyst at Horizons ETFs (Canada) Inc. He focuses on technical analysis and seasonal investing. Credit: Supplied photo

A recent report by Dun & Bradstreet offered a list of goods most affected by bottlenecks in China’s Meishan terminal in the Port of Ningbo-Zhoushan. The port is the world’s third largest container port and one of many Asian ports affected. The list includes car parts and accessories, furniture, tableware, kitchenware and toys with wheels such as tricycles, scooters and doll carriages.

Nike (NYSE:NKE) has warned that supply chain problems will affect production and delivery of its shoes and apparel through next spring.  Nike makes about three-quarters of its shoes in Southeast Asia. Half of all shoes are produced in Vietnam where it has lost 10 weeks of production since July.  Rising Covid cases led to government-imposed factory shutdowns.  

There are plenty of pressure points. A global mismatch between where ships and containers are and where they need to be is one. Passenger airline traffic has shrunk, so airlines are moving less so-called ‘belly cargo.’ A shortage of dock workers has caused backlogs in the ports of Long Beach and Los Angeles, Ca., which handle 40 per cent of all U.S. container ships.

 Other companies have reported similar problems, including Abercrombie & Fitch (NYSE:ANF) Adidas AG and Hasbro (NDQ:HAS).  Home Depot (NYSE:HD) and Costco (NYSE:COST) have rented dedicated containers to expedite their orders. 

Last week, U.S. President Joe Biden said both ports would move to 24/7 operations to ease product shortages. He also said major companies including Walmart Inc., United Parcel Service and FedEx Corp. would expand their working hours for the same reason.

It adds up to many kinks in the chain that need time to unwind.

Elliot Johnson, chief investment officer at Evolve Funds Group Ltd. in Toronto, says the situation has affected two of its funds differently. Evolve’s Automobile Innovation Index Fund (TSX:CARS) holds companies developing electric vehicle components. The companies in it have been affected by the global shortage of computer chips. Its Evolve E-gaming index ETF (TSX:HERO) has been a beneficiary as gamers have moved online to order games.

“Digital goods are more resilient because you don’t have to ship anything,” he says. “They have really been a winner.”

Mr. Johnson says the much publicized shortages of computer chips for cars has a silver lining for investors. For now, prices are high and choices limited leading many to delay purchases. When conditions normalize, prices will fall and he expects sales to jump, especially sales of electric vehicles.

“The chip shortage in the car industry is a phenomenal opportunity for investors.  That pent up demand will lead to record breaking quarters of sales [for the automakers.]”

 Mr. Johnson says investors should put the current situation in perspective and keep their eye on longer term trends.  

Elliot Johnson is Chief Investment Officer at Evolve ETFs in Toronto. Credit: Supplied Photo

“The world will get back to normal,” he says. “In the long term, I think we just find a new [supply chain] equilibrium. In the meantime, you’re going to have these weird shortages.”

Both Mr Thackray and Mr. Johnson see things improving over the next 12 to 18 months.

In the meantime, companies that deliver goods within Canada and the U.S. are set to gain. RBC Dominion Securities analyst Walter Spracklin sees two Canadian shippers among them. One is Mississauga-based Cargojet Inc. (TSX:CJT), which controls more than 80 per cent of Canada’s overnight air cargo market. The other is Montreal-based TFI International Inc. (TTSX:TFII), Canada’s largest trucking company.

Mr. Spracklin argues in a recent report on Cargojet that passenger airlines will gradually move more freight as travelers return and flights pick up. But big customers like the reliability offered by dedicated freight airlines like Cargojet, which is expanding is fleet to meet demand.  

Mr. Spracklin is equally positive about TFII. It has 25,000 employees and offers courier, delivery and logistics services across North America. Mr. Spracklin points to its transcontinental reach and scale. TFII’s recent purchase of UPS’ less than truckload (LTL) and truckload (TL) freight operations has significant potential, he says.

 Mr. Johnson says things seem chaotic, but there is plenty of reasons to be optimistic.

“If you’re investing in a growing industry that growth will continue. It’s easy to be overwhelmed by bad news, between the pandemic and all the other concerns. But don’t lose sight of the fact that we’ve got some really astonishing changes happening around us.”

 This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Oct. 19, 2021. For reprint information please view this page.

2 comments on “Supply chain woes offer investor opportunity

  1. Thanks for the Great overview. Much appreciated.

    Like

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