Been thinking about this a lot lately. Here is what I have so far… Negative reaction to inflation General mills CPB HNZ Whirlpool MCD CAG Grocery stocks Airlines Small restaurants Homebuilders (not 100% on this one) All these co’s, I believe, will face increased input costs, reduced top line revenue growth and margin compression. All of these companies face heavy reliance on input costs, in particular I think the hardest hit will be GIS and MCD. MCD relies on corn for almost all their products, an substantial, structural move in corn inputs will mean a margin squeeze or higher prices for an already price-conscious demographic. The same argument holds true for GIS, I cannot imagine someone paying 8-9 dollars for a box of coco puffs or cinnamon toast crunch. A great deal of this sensitivity relies on the price consciousness of the associated demographic. For instance, if Whirlpool raises the price of a 800 washing machine 10% most people wouldn't take TOO much notice since a large purchase like that is usually a necessity and not a frequent purchase. Cereal/food on the other hand will have a much more price elasticity since most of these purchases are not completely essential. A 1 dollar increase in the box of cereal/oatmeal will definitely turn off many buys and have sever implications on top and bottom line. Positive reaction to inflation Equities in general Oil producers/refiners PBR DO RIG SLB CVX ? I think there is more to this trade than energy, however, this is the first sector I think of, I prefer non dollar reliant companies like SLB and PBR. I also think that commodity refiners will be a good place to be, I would think that pipeline operators (EP) would be lucrative since they deal with volume, not input costs, one thing to consider here is how long their contracts are and what the renewal rate is. Also, Canadian oil sand producers might come into much more favor than they're currently in since the hurdle rate for oil from the sands are ~98/bbl. Buying gold may seem like an old trade, however, as Ray Dalio pointed out it is a form of currency, a good way to hedge out risk of an overall bearish macro outlook for USD. Some trading ideas would be to buy straddles and roll the contracts month to month since this is more of a structural shift and will likely not trigger a multiple standard deviation event, I would be weary of earnings season with the bears since they might/should surprise to the downside. TIPS or TIP etf would seem like an obvious place to park some , however, I’m wondering if that trade isn’t already too crowded/not high enough beta since you’d be buying something tied to fixed income.
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Short duration fixed, commodities (I’ve been in iron ore, base metals, agri chemicals), REITs, infrastructure. Shameless plug: JP Morgan Tax Aware Real Return Fund is kind of interesting. It invests in munis (tax-exempt income) and uses CPI swaps to provide inflation protection. Not sure if CPI is capturing the same type of inflation you are looking for, however.
Watch out for TIPS. TIP and most TIPS mutual funds have a duration around 6-8 years. People forget that TIPS are still bonds and will get dinged accordingly when rates rise, as they tend to do when inflation starts to run. REITs also tend to get hurt by rising rates, but not all of them. Depending on where the inflation is coming from you should look at currency plays as well.
Sweep the Leg Wrote: ------------------------------------------------------- > Depending on where the inflation is coming from > you should look at currency plays as well. Go watch Ray Dalio’s 20 minute CNBC interview…NOW! You’ll thank me later.
I wouldn’t say that all food manufacturers are going to get dinged. Companies that are able to maintain high inflation pass through rates will be fine.
Chuckrox8 Wrote: ------------------------------------------------------- > I wouldn’t say that all food manufacturers are > going to get dinged. Companies that are able to > maintain high inflation pass through rates will be > fine. That’s the key. If you can pass on higher costs to your customers (or back to your suppliers), then you’re going to perform relatively well, compared to those who dont. That’s the key in the equity space.
bchadwick Wrote: ------------------------------------------------------- > Chuckrox8 Wrote: > -------------------------------------------------- > ----- > > I wouldn’t say that all food manufacturers are > > going to get dinged. Companies that are able > to > > maintain high inflation pass through rates will > be > > fine. > > That’s the key. If you can pass on higher costs > to your customers (or back to your suppliers), > then you’re going to perform relatively well, > compared to those who dont. That’s the key in the > equity space. Completely agree as well. Whirpool - for instance - can pass on pricing. McDonalds, however, has much more price elasticity, at the end of the day, people won’t pay 5 ot 6 dollars for a big mac.
ASSet_MANagement Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Chuckrox8 Wrote: > > > -------------------------------------------------- > > > ----- > > > I wouldn’t say that all food manufacturers > are > > > going to get dinged. Companies that are able > > to > > > maintain high inflation pass through rates > will > > be > > > fine. > > > > That’s the key. If you can pass on higher > costs > > to your customers (or back to your suppliers), > > then you’re going to perform relatively well, > > compared to those who dont. That’s the key in > the > > equity space. > > > Completely agree as well. Whirpool - for instance > - can pass on pricing. > > McDonalds, however, has much more price > elasticity, at the end of the day, people won’t > pay 5 ot 6 dollars for a big mac. I dont agree with your thesis on MCD. Sure inflation will put upward pressure on menu prices but I think you are overestimating elasticity. After all inflation will increase prices on everything so you have to look at substitutes. Sure the price of a Big Mac could go upp a buck but with prices everywhere running up, consumers are going to resort to low cost alternatives and MCD has a knack for that and efficiency. I believe they are in a better position than most to adapt to the changing cost structure and squeeze out every penny they can. I do agree on the grocery store play. I’m particularly fond of shorting Whole Foods (WFMI). Its trading 36X earnings and has double digit top line growth priced in. I think they will have a harder time passing through inflation as consumers switch over to non-premium (if you will) groceries stores.
I’m not convinced that the cost of food is a major driver of McDonalds’ margins. Labor and capital costs are likely substantially higher. I know McDonalds made an announcement that food costs are affecting its operations, but I suspect that it’s more of an excuse to jack up prices. The cost of a burger might go up 20 cents, but McD’s will raise the price 30 cents and pad its margins. I think that big mac consumption is also pretty inelastic. People don’t want the best burger they’ve ever had; they want the same burger they’ve always had, and it’s hard to get cheaper than McD’s unless you’re willing to cook yourself.
EVERYTHING made by McDonalds is dependent on the price of Corn, from the feed for their cattle, to the high fructose corn syrup they put into their Coca Cola to the oil they fry their fries in. That combined with other rising input costs I think will put major compression on the margins. Further, minimum wage laws likely won’t change through this bout of inflation (because, hey, it’s what we wanted right?) so relatively speaking McDonalds will be paying uninflated wages to their workers, this I think could be a saving grace from input pressure.
Short Protein names like SAFM, PPC, DF who use Corn and Soybean meal as input costs. SAFM, PPC etc are the ones who provide chicken to chains like MCDs, KFC, etc. These chains are mass buyers and have good negotiating power on chicken producers, who are a very fragmented industry. Go long Ag Processors (ADM, BG) and fertilizers (CF, POT). these names have run up between 30-100% in LTM but still some upside given that the Ag cycle aint turning anytime soon. US exports should remain strong as EMs like China and MENA countries will focus on increasing food stockpiles to avoid a Egypt/Libya situation.
I’m not sure how exactly you’re looking to use straddles to put these positions on but my suggestion would be to stick to the actual underlying in this case. Not particularly familiar with any of these companies but do they hedge thier commodity exposure (and if so, is that transparent)?
How about job recruiters like RHI and KFRC? Inflation should be positive for their top line growth as you’d expect salaries of the people they place to increase. This will obviously be highly correlated with the unemployment rate though.
I think that the price of cereal is like $.25 per box that relates to corn the rest is transportation costs related to price of oil. corn is also planted annually unlike oranges, grapes etc and therefore farmers can easily increase supply to meet demand.
LPoulin133 Wrote: ------------------------------------------------------- > I’m not sure how exactly you’re looking to use > straddles to put these positions on but my > suggestion would be to stick to the actual > underlying in this case. > > Not particularly familiar with any of these > companies but do they hedge thier commodity > exposure (and if so, is that transparent)? Wrong terminology on the options piece. Buying/shorting the underlying would be the first leg of the trade.
Looks like you have the confidence part of the skillset down.
When I’m worried about inflation, a little PBR is usually just what I need.
PIMCO Commodity Real Return - TIPS portfolio with a commodity overlay tied to DJ UBS Commodity Index.
NakedPuts Wrote: ------------------------------------------------------- > When I’m worried about inflation, a little PBR is > usually just what I need. Nice