2 Stocks for Global Supply Chain Disruptions

October 21, 2021

The supply chain disruption is still pervasive. Investors need to understand the current supply chain issues and hedge their portfolios accordingly. Any supply chain disruption has a broad ripple effect through global markets. The current issue is primarily between China (the manufacturer) and the United States (the end consumer). The Maritime Executive reports that Chinese ports account for 40% of global container trade with the leading trade routes being the west coast of the U.S. and Northern Europe.

China initiated closures to manufacturing plants and ports due to the global pandemic and the more recent power-shortages plaguing the world’s largest exporter. The closures of China’s Yantian, Ningbo and Guangdong ports were particularly detrimental for shipments heading to the San Pedro Bay. The San Pedro Bay feeds the ports in Los Angeles and Long Beach. The Port of Los Angeles is the largest port in the U.S. It carried 9.2 million TEU’s (twenty-foot equivalent unit) compared to Yantian’s 13.3 million in 2020, according to Flexport.

When ocean freight slows there are container ships (ocean carriers) already en-route to both sides of the Pacific. As this conveyer belt slows down, ocean carriers anchor in the ocean waiting to dock or they travel the seas with empty payloads.

The number of ocean carriers waiting to dock has increased dramatically. In Feb 2021, Seko Logistics noted that 30 container ships were seen at anchor in the San Pedro Bay. In October 2021, there were 103. ???

The amount of time some container ships are waiting is more than a month. In December 2019, just prior to the pandemic, the average was 4.6 days.

"The cost across the supply chain is very heavy, millions of dollars per vessel per day, when they sit not doing their business," said Kevin Krause of Ocean Services at Seko Logistics. These costs are felt across the entire supply chain.

Savvy investors could protect themselves from also feeling the pain across the rest of their portfolios.

As the economy recovers, the Materials sector is one to watch. There are two companies in this sector to keep an eye on…

The first stock pick recycles critical materials. The company has grown earnings at an annualized rate of 49% over the last 5 years. In 2020, it held an Average Annualized P/E Ratio of 11.2. Based on earnings estimates, the Forward P/E is 3.85. The dividend has increased every year since 2010. This company’s balance sheet in Q3 2021 holds $11.54 billion in Total Assets, $3.02 billion in LT Debt, and $1.10 billion in Cash & Cash Equivalents. A Debt/Equity ratio of 1.05 is reasonable for a company that has a share repurchase program representing 3% of its outstanding shares.

When looking at option “greeks” for the first stock pick, the Delta value placed on options expiring on January 20, 2023 demonstrates that investors are expecting more upside than downside. Equal probabilities exist for the stock to close at $45 per share as closing at $100 a share on that date. The skew to the upside from today’s price of $63.50, presents a potential reward of 57.4% compared to the downside risk of 29.1%. This is a very heavy skew and a strong indication of upside potential.

The second stock pick is focused on efficiently producing necessary materials. The company has grown earnings at an annualized rate of 26% over the last 5 years. In 2020, it held an Average Annualized P/E Ratio of 12. Based on earnings estimates, the Forward P/E is 4.49. The dividend has increased every year since 2009. This company’s balance sheet at the end of Q3 2021 holds $24.95 billion in Total Assets, $5.39 billion in Total Debt, and $3.12 billion in Cash & Cash Equivalents. The company boasts a Debt/Equity ratio of 0.44. This company missed consensus estimates in Q3 2021 of $7.46 per share, by reporting net earnings of $7.28 per share. Considering the company’s recent supply and demand environment, this creates a buying opportunity.

When looking at option “greeks” for the second stock pick, the Delta value placed on options expiring on January 20, 2023 demonstrates that investors are expecting more upside than downside. Equal probabilities exist for the stock to close at $73 per share as closing at $173 a share on that date. The skew to the upside from today’s price of $102, presents a potential reward of 69.6% compared to the downside risk of 29.4%. This is a very heavy skew and a strong indication of upside potential.

You’ll receive these two stock picks for free when you schedule a free financial wellness consultation!

https://www.thriveportfolios.com/consultation