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Where to Hide From Soaring Commodity Prices

By Larsen Kusick, analyst, Phase 1 Investor
Monday, May 2, 2011

Last Friday, my colleague Frank Curzio showed readers how rising commodity prices are hurting companies in what many consider a "safe haven" sector: consumer staples.
 
These are companies that make and sell "the basics": toothpaste, diapers, soda, tissues, and so on. And right now, with soaring commodity prices, they're paying higher costs for raw materials. They won't be able to pass all those costs along to the consumer, so their profit margins will be pinched.
 
As an investor, there are a couple strategies to use in order to protect yourself from soaring commodity costs.
 
The most obvious way is to devote some of your portfolio to companies with "stuff in the ground," like oil producers and copper producers... or fertilizer producers that benefit from rising corn, cotton, and soybean prices.
 
But another "safe haven" strategy is going unnoticed by most people... it's to own companies with minimal exposure to inflation and commodity costs... whose products are in desperate need to increase productivity (and thus, "dampen" the effects of raw material increase).
 
The sector I'm talking about is technology. You see, whether a company sells software or millions of tiny computer chips, commodity costs are a small fraction of its expenses.
 
For example, Microsoft makes billions of dollars selling its Windows software – which obviously doesn't include any kind of raw materials. Even its Xbox division – one of the few segments to include manufacturing costs – hardly moves the needle. An Xbox system that sells for $200 has just a few dollars' worth of plastic and metal.
 
The tough part of this strategy for individual investors is that most companies don't disclose how much they're hurt by high commodity costs. The numbers are buried in the "cost of goods sold" (COGS) or "cost of sales" line on a company's income statement. They're mixed in with labor costs, distribution costs, and anything else the company treats as a cost of making its goods. For clues on where to put your money, we have to get a little creative...
 
Last week, I searched through transcripts of some of the latest company conference calls. These calls give investors an idea of the critical issues companies are facing.
 
Take Gildan Activewear (GIL) for example. Gildan makes T-shirts, socks, and other basic clothing. Its biggest concern is cotton prices, which have doubled in the past year. No surprise, the word "cotton" appeared 84 times during its last conference call in February.
 
Below is a list of companies like Gildan – consumer staples companies that are battling rising prices for raw material. I included the number of times words like "inflation," "commodities," or "input costs" came up during their most recent conference calls...
 
Company
"Inflation"
"Commodity"
"Input Cost"
Kimberly-Clark
21
11
3
Coca-Cola
4
15
0
Colgate Palmolive
4
20
0
Kraft
8
5
20
Nike
4
0
15
 
As you can see, the executives and analysts who cover these companies are worried and about commodity prices and inflation.
 
By contrast, take a look at how many times these topics came up during the recent conference calls for major tech and telecom companies...
 
Company
"Inflation"
"Commodity"
"Input Cost"
Intel
0
0
0
Microsoft
0
0
0
IBM
1
0
0
Oracle
0
0
0
Apple
0
2
0
Verizon
0
0
0
AT&T
0
0
0
 
Of course, this "anecdotal" analysis isn't what you want to base a big investment on. But the basic idea is clear. Tech companies aren't worried about the commodity rally like companies that sell "the basics."
 
Growth Stock Wire readers already know some big tech trends to focus on... like the "gadget boom"... and big tech companies like Intel and Verizon. If you must be in stocks right now, these are a great place to hide from rising prices for raw materials.
 
Even if you're not convinced on the tech sector, keep the trend in mind. Before buying any stock, check to see how vulnerable it is to elevated commodity prices. It's bad enough that we'll all being paying more for basic goods like Kleenex over the next year. There's no need to own companies facing the same problem.
 
Good investing,
 
Larsen




Further Reading:

Larsen has been bullish on semiconductors since December. The benchmark S&P 500 is up an impressive 14% in five months, but the semiconductor index is up more than 26%. Get the full story here: Tech Investors Are Ignoring the Start of a Big Bull Market.
 
"While investors are starting to flock to many of the smaller, riskier names in the semiconductor sector, they're ignoring" this company, Larsen told readers in January. That company is up more than 8% and is still a bargain. Learn more here: You're Ignoring the Best Bargain in Tech's Hottest Sector.

In The Daily Crux
Market Notes
Natural gas prices jump to three-month high.
 
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Caterpillar soars to new all-time high after reporting quarterly earnings.
 
Cable providers booming… Comcast, Time Warner, Dish Network, and DirecTV surge to multi-year highs.
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