For those who have already been following me on other platforms (Twitter, StockTwits, SeekingAlpha, or in JD Henning’s Value & Momentum Breakouts service) I wanted to give a quick overview of the four themes across my portfolios at the moment. In order of conviction and position sizing:
I’m very heavily weighted in all things metals, mining, shipping, materials, commodities, energy. Within energy, particularly natural gas, coal, and uranium, but also oil.
I have some individual favorites: AEHR, AMTX, GOOGL, PBR.A, SIGA, U.
Long Monkeypox plays—I call it #moneypox
Short China
This first post will focus on two critical ways in which inflation affects different companies and industries differently, and how that leads to my high conviction in the metals, mining, shipping, materials, commodities, and energy areas of the market. Future posts will address the rest of the themes.
It’s All About That Inflation
Just as political commentator James Carville famously quipped in 1992 “it’s the economy, stupid!” the agile investor in the the current market could also say “it’s inflation, stupid!”
Inflation is the most obvious play around, and it’s the #1 driving factor of everything across the worldwide economy and markets. Inflation affects some industries more than others. Here I’m focusing on inflation in two important perspectives: elasticity of demand, and hierarchy on the supply chain.
Elasticity of Demand
Elasticity is the extent to which demand is affected by price. The more elastic the product (or service), the more sensitive it is to price.
Generally the more discretionary (i.e. less essential) the product/service, the more sensitive it is to price. If inflation makes dining out 30% more expensive, people don’t dine out as often. Other examples are name-brand products (Heinz ketchup, Shell gas/petrol) that are easily substituted with generic versions (store brand ketchup, Costco gas). For data nerds and econ students, the graphs below illustrate. The more elastic the product (graphs #3, #4, #5) the more quickly the demand drops off as price rises.
From a consumer perspective, examples of inelastic products include: food, rent (or cost of housing), your utility bills, gas/petrol, auto parts, etc. Even as we all gripe about the cost going up, we cut in other (discretionary, elastic) areas as necessary in order to continue paying for these essential, inelastic products.
In an inflationary environment you want to avoid stocks, companies, and industries that are elastic. I look for companies and industries whose products are inelastic, which is to say that the demand for their products changes relatively little (graph #2) or practically none (graph #1) even as price goes up.
Take a look at the YTD performance of US sector ETFs: you’ll notice that energy, utilities, consumer staples and health care—the most inelastic sectors—have done best; and the consumer discretionary and communication services (think social media, streaming and cable TV, video games) are the worst.
During difficult times (inflation, recession, stagflation) companies with inelastic products will always outperform companies with elastic products.
Supply Chain Hierarchy
A quotation that acts as my guiding principle here is to “act for [yourselves].. rather than be acted upon.” In other words, be the act-or (the one who acts) rather than the act-ee (the one who is acted upon).
With supply chains, we can observe that the further down the supply chain you go, the more inflationary forces are acting upon you. The cumulative effect increases at every stage along the way, creating additional cost pressures and impacting margins more and more.
I’d rather invest in those who act, rather than those who are acted upon. Therefore,
I look for companies and industries who are closer to the top of the supply chain rather than the finished product at the end of the supply chain.
Example: Albemarle vs. Ford
Great example here is Ford’s price increase announcement yesterday on their F-150 Lightning EV trucks which went up $6,000 to $8,500 due to “significant material cost increases and other factors.”
Contrast this with Albemarle (ALB), the largest lithium producer. While inflation has hit ALB it can only be from rising payroll costs, and costs to ship their product. But by the time Ford (F) sells their F-150 Lightning they’ve had to absorb the cumulative price increases of the entire supply chain, from mining basic materials all the way to the destination charge to deliver the vehicle to the end dealer. If you had to guess, who do you think has more pricing power for their product: Albemarle (ALB), which mines the lithium, or Ford (F) who sells the final product?
Judging by the YTD performance of ALB vs. F below, probably ALB has greater pricing power.
Companies with inelastic products or in inelastic industries are good, and being higher up on the supply chain is good too. But it’s even better when you can combine the two: a company high up the supply chain within an inelastic industry.
Therefore.. What?
The above principles have led me to these kinds of industries, companies and ETFs:
Oil and Gas Equipment and Services. These companies supply the equipment, tech and staffing for oil and gas production, one of the most inelastic products there are. Here’s a list of the top YTD performers within this industry with at least $2B in market cap:
XOP, OIH, and XES are great ETF options for the space too:
Agricultural Inputs. These companies supply fertilizers, seeds, and herbicides to food growers. Can’t get much higher on the supply chain in an inelastic industry than that! These are my favorite individual names in this category:
And for ETFs I like VEGI, FTAG and MOO:
Metals and Mining. There are several individual names I like here, but I really like XME as a way to get broad exposure here with an ETF.
That’s it for my first, inaugural issue of The Agile Agent Newsletter!
If you enjoyed it, please like, subscribe, and share with a friend! Please give me feedback or suggestions for future content by reaching out to me on Twitter @theagileagent
I am very interested in Lithium plays and I enjoyed your example of ALB. 2 Lithium plays of interest to me: SGML and CXOXF. 1 additional mining play: DMEHF for helium and hydrogen.
I will add more info about them another time but I would be interested if you have looked at any of them and your thoughts?
Finally, I look forward to this service as I have followed you on JD's service.
Hi Charles and thanks for being the first comment! As the largest market cap in the Lithium space ALB was a good company to use for a real life illustration of the concept. The other tickers you mention have not been on my radar likely because of much smaller market cap and OTC status. I'll have to check them out. Meanwhile, the LIT etf is a great choice too because it gives you broad exposure to the entire Lithium industry while minimizing company-specific risk.