Supply chain problems have upended the global economy as sporadic COVID-19 outbreaks in Asia have closed factories and created labour shortages at cargo terminals, delaying the shipment of goods.
As the all-important holiday season approaches, investors who own some well-known brands that make shoes, apparel, and fashion should be aware they face a weak season. For companies that source their products within North America, it will probably be a better season. Companies that provide shipping services by road and air within North America may also benefit as freight rates rise. And for those that 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, 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 [the holiday season] is that some of the goods aren’t going to get here.”
When it comes to holiday shopping, it’s the early bird who will get the goods this year. Some products 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, says Mr. Thackray, who manages Horizons Seasonal Rotation ETF HAC-T.
A recent Dun & Bradstreet Corp. report provided a list of goods most affected by bottlenecks in China’s Meishan terminal in the Port of Ningbo-Zhoushan, the world’s third-largest container port. It includes car parts and accessories, furniture, tableware, kitchenware, and toys with wheels such as tricycles, scooters, and doll carriages.
Nike Inc. NKE-N warned investors during its latest sales outlook in late September that supply chain problems will affect the production and delivery of its shoes and apparel through next spring. Nike makes about three-quarters of its shoes in Southeast Asia. Specifically, half of all its shoes are produced in Vietnam, where it has lost 10 weeks of production since July as rising cases of COVID-19 have led to government-imposed factory shutdowns.
Other companies have reported similar problems, including Abercrombie & Fitch Co. ANF-N, Adidas AG ADDYY, and Hasbro Inc. HAS-Q. Meanwhile, the Home Depot Inc. HD-N and Costco Wholesale Corp. COST-Q have rented dedicated containers to expedite their orders.
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 dockworkers has caused backlogs in the ports of Long Beach and Los Angeles in California, which handle 40 per cent of all U.S. container ships.
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 all adds up to many kinks in the supply 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 Automobile Innovation Index Fund CARS-T holds companies developing electric vehicle components, which have been affected by the global shortage of computer chips. In contrast, Evolve E-Gaming Index ETF HERO-T 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 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.
“The world will get back to normal,” he says. “In the long term, 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.
Walter Spracklin, managing director, equity research analyst, transportation and industrial sector, at RBC Capital Markets, sees two Canadian transportation companies among them. One is Mississauga-based Cargojet Inc. CJT-T, which controls more than 80 per cent of Canada’s overnight air cargo market. The other is Montreal-based TFI International Inc. TFII-T, Canada’s largest trucking company.
Mr. Spracklin argues in a recent report on Cargojet that passenger airlines will gradually move more freight as travellers return and flights pick up. Nevertheless, big customers like the reliability dedicated freight airlines like Cargojet, which is expanding its fleet to meet demand, offer.
He is equally positive about TFI International. It has 25,000 employees and offers courier, delivery, and logistics services across North America. Mr. Spracklin points to its transcontinental reach and scale. The company’s recent purchase of UPS’s less-than-truckload and truckload freight operations has significant potential, he says.
Mr. Johnson, for his part, says things seem chaotic, but there’s plenty of reasons to be optimistic.
“If you’re investing in a growing industry that growth will continue,” he says. “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 have some really astonishing changes happening around us.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.