5 Stocks Making the Most of Supply-Chain Issues

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published 15 September 2022

The economic banishment of all things Russian. Tariffs on Chinese imports. Pandemic-caused shortages of computer chips, bicycles, garage door parts and other imports. Brexit.

Just about everywhere you turn, you can see that the tectonic plates of the global economy have stopped converging and are starting to pull apart in ways that will determine new winners and losers, says Ethan Harris, head of global economics for Bank of America Securities. "Deglobalization is a gradual process, and in the long run, very important" to investors, he says, because it will have profound impacts on corporate profitability.

Globalization refers to the increase of commerce across borders. U.S. companies prospered for decades as new markets opened for their goods and labor costs plummeted thanks to overseas production. Strategists at BofA have estimated that over the past 20 years, globalization has contributed more than half of what has been a robust expansion in profit margins. Globalization has also helped to deliver low-cost goods to American consumers.

But now, says market strategist Ed Yardeni, the pandemic and spreading political and military conflicts have stretched supply chains past the breaking point, prompting companies to bring many operations closer to home. "Deglobalization was almost inevitable," Yardeni says. U.S. companies are starting to "reshore" production back to the U.S., "near-shore" it to neighbors such as Mexico, or "friend-shore" it to allies such as Vietnam.

Investment firm Piper Sandler counted more than 900 announcements of companies either building or expanding manufacturing facilities in the U.S. in the 12 months ending in May of 2022. In 2012, there were only about 100 such announcements. Over the long term, companies should benefit from more-reliable processes. Yardeni predicts that among the biggest winners will be companies with economic bases in the U.S. that leverage cost-saving automation to offset higher wages and energy expenses.

"Globalization 2.0 is more of a rightsizing than the end of globalization," says Jake Oubina, senior U.S. economist at Piper Sandler. Rising interest rates and a threatened recession may slow or pause some reshoring projects. But longer term, he sees a wide-open field for investors willing to bet on a new productivity boom. "Companies are going to find ways to lower their cost structures. We are just at the infancy stages of a productivity revolution."

Disclaimer

Prices and other data are as of Aug. 5. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

Topics

Stock Watch

Ametek

Sector: Industrials
Market value: $29.0 billion
Dividend yield: 0.7%

Osterweis Capital Management is bullish on deglobalization – and on Ametek (AME, $126), a Berwyn, Pennsylvania-based manufacturer of precision instruments and electromechanical devices that should benefit from investments in productivity, says portfolio manager Larry Cordisco. Ametek has been buying up robotics and automation companies. The company is "a well-known consolidator with a really great history of growing earnings," Cordisco says.

Joshua Aguilar, a senior analyst at investment research firm Morningstar, says the company's move into the health industry is especially promising because so many hospitals have struggled with staffing shortages. "Health care automation solutions will be a boon" for the company, he says. He notes that Ametek's overall leadership position in many markets has allowed it to raise prices ahead of inflation and increase profitability.

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Applied Materials

Sector: Technology
Market value: $95.4 billion
Dividend yield: 1.0%

Americans invented the computer chip. But many of the pioneering manufacturing plants in the U.S. couldn't compete with lower-cost Asian fabrication facilities. By the start of the pandemic, the U.S. produced only about 12% of the world's chips. That was nowhere near enough to serve the many appliance, automobile and other factories in North America that had to sit idle during the pandemic because of chip shortages.

Now chip manufacturers are scrambling to produce more chips in the U.S. And, in a rare example of bipartisanship, Congress recently passed a bill to provide financial incentives to chip manufacturers. A good way to take advantage of this coming boom in chip production is to look at suppliers to chip manufacturers, says Todd Ahlsten, chief investment officer for Parnassus Investments. He has bought up shares of Applied Materials (AMAT, $110), which, among other things, makes the equipment needed to etch circuits onto the silicon wafers used as the base for chips. Ahlsten worries that a surge in manufacturing could create a short-term glut of chips. "But if you have a three-year time horizon, Applied Materials is going to be fantastic," he says.

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Deere

Sector: Industrials
Market value: $104.9 billion
Dividend yield: 1.3%

Deglobalization is one of a handful of big economic trends that strategists currently consider when picking investments for the Strategas Macro Thematic Opportunities ETF, says Ryan Grabinski, a managing director on the strategy team for Strategas. Deere (DE, $343), the farm and construction equipment giant and a fund holding, fits the theme as a likely beneficiary of reshoring activity. "Reshoring is already evident in private, nonresidential construction activity, with manufacturing representing the third-largest category," Grabinski says.

Parnassus's Ahlsten is also a fan. "Deere isn’t just a tractor company; it's a technology company. Deere is using computing power to enable precision agriculture," which conserves resources such as water and fertilizer. That high-tech bent makes Deere a holding with staying power for patient investors. "It's a great long-term stock," says Ahlsten. "The next 10 years will be better than the last 10."

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Lincoln Electric Holdings

Sector: Industrials
Market value: $8.3 billion
Dividend yield: 1.6%

Lincoln, founded in 1895 and headquartered in Cleveland, has been beefing up its welding automation business, notes Baird senior research analyst Mircea Dobre, who recommends the stock. Automation accounted for about 15% of the company's sales in 2021 but was rising at twice the rate of its more-traditional manual welding equipment and was on track to nearly double sales to $1 billion by 2025, he says. And the company's product mix and market dominance allow it to keep raising prices, and thus expand profit margins, even during rising inflation.

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Union Pacific

Sector: Industrials
Market value: $142.8 billion
Dividend yield: 2.3%

Companies may be pulling back from China and Russia, but that doesn't mean they will return only to the U.S. Instead, Adam Posen, president of the Peterson Institute for International Economics, expects a "corrosion of globalization" to boost commerce among allied or friendly countries, with many manufacturers moving production to low-wage countries either geographically or politically closer to large consumer markets. Mexico could be one of the biggest beneficiaries of such near-shoring and friend-shoring, Posen says.

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Kim Clark is a veteran financial journalist who has worked at Fortune, U.S News & World Report and Money magazines. She was part of a team that won a Gerald Loeb award for coverage of elder finances, and she won the Education Writers Association's top magazine investigative prize for exposing insurance agents who used false claims about college financial aid to sell policies. As a Kiplinger Fellow at Ohio State University, she studied delivery of digital news and information. Most recently, she worked as a deputy director of the Education Writers Association, leading the training of higher education journalists around the country. She is also a prize-winning gardener, and in her spare time, picks up litter.