Supply Chain Woes Or Opportunity?
With the S&P 500 gripped with fear and deep into a corrective action a question on the minds of many investors is where to put money in Q4. While the market is plagued by woes stemming from rising fuel costs, raw material inflation, freight shortages, and labor issues these headwinds have a silver lining. The global issues plaguing the market are due to record high levels of demand throughout the economic system, demand that is creating opportunity for more than one business. Today we’re looking at three industries that are not only insulated from many of the global supply-chain issues plaguing the market but are benefiting from them.
Energy Is Energized By Rising Prices
The Energy Sector has had a rocky couple of years first hit by triple-digit earnings declines in 2020 and now followed up by triple-digit earnings gains in 2021. The swing in profits has been so large, in fact, that Factset has not listed a consensus for the sector for many quarters. Exxon (NYSE: XOM), the single largest holding within the XLE Energy Sector SPDR (NYSEARCA: XLE), saw its revenue surge to 108% YOY growth in the previous quarter and we see that pace persisting at least into the current quarter. The revenue strength will be driven by both rising demand linked to the economic reopening and recovery as well as rising prices.
As far as prices go, Marketbeat.com data indicates the price of WTI just broke out to a new 6-year and is likely going higher. The takeaway for investors is that revenue and earnings growth is on the table but, more importantly, free cash flow is vastly improving and on the upswing. This makes the high-yielding sector more attractive than ever and there are share-buybacks on the horizon as well.
The Semiconductor Sector Is Fundamental
The semiconductor sector is not only fundamental to today’s technology but to the global supply chain issues at hand. Widespread shortages of semiconductors are impacting the manufacture of components and end-products like automobiles. The automobile sector is the highest-profile industry to be hit by the microchip shortage but it is not the only one. As it stands, the industry is working hard to catch up but the shortages appear to be getting worse. What this means for the semiconductor industry is an opportunity not only to ramp production and maximize output but to expand operations and hasten the switch to higher-performing microchips and integrated circuits.
Of all the S&P 500 industries this is the one we rate with the highest potential to exceed expectations. The analysts are expecting growth from most but not all of the semiconductor stocks this quarter and we think this is underestimating the fundamental conditions. The SOX Semiconductor Index (NYSEARCA: SOXX) is down nearly 10% going into the earnings season, we think this is setting up a buying opportunity for later in the season.
Labor Services Are In High Demand
As tight as the labor market is, businesses across the US are hiring in droves and that is driving business for companies like Cintas (NASDAQ: CTAS), Automatic Data Processing (NASDAQ: ADP), and Paychex (NASDAQ: PAYX). Insulated from many of the input costs associated with the industries they serve, these businesses have surpassed their pre-COVID business levels by a fair margin already and have ample leverage for the future. While the number of employees per client fell during the peak of the shutdowns the number of clients claimed by these businesses only went up. Now, with the economic recovery well underway and many businesses still underemployed, the outlook for revenue and earnings growth is bright. Cintas and Paychex have already reported for the 3rd quarter, both beat their consensus and provided a positive outlook, Automatic Data Processing reports at the end of the month. All three pay attractive and growing dividends, too.
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