Covid case surges in Vietnam and other Asian countries have resulted in factory closures and production disruptions.
“The production halts in Southeast Asia that began in August as a result of COVID have served to heighten shipping delays and costs across the industry spectrum,” Cowen’s John Kernan wrote in an Oct. 8 note. As earnings season approaches, this is likely to result in expected guidance revisions, he added.
Cowen examined major retailers’ exposure to sourcing in Vietnam and China to see how supply chain issues might affect them.
Foot Locker, Adidas, Nike, and Puma top the list for Vietnam sourcing exposure, with 45 to 50 percent exposure.
However, exposure is not the only factor influencing companies’ risk of supply chain issues. Companies that can pass on higher costs to customers will fare better than those that can’t, according to Cowen.
“Price increases can offset recent input cost inflation, while full-price sell through should remain strong,” Kernan said.
Lululemon Athletica, Dick’s Sporting Goods, Yeti, Figs, Under Armour, and Deckers Outdoor are Cowen’s top retail and consumer brand picks for the new year.
Off-price retailers, which sell branded items at reduced prices, are another potential winner from ongoing supply chain disruption. As examples, Cowen cited Burlington Stores, TJX Companies, and Ross Stores.
“The Off-Price retail business model is uniquely positioned to capitalize on supply and demand imbalances, and goods remain plentiful, as do open-to-buy dollars,” Kernan said.
According to Cowen, supply issues will likely have an impact on shopping as the year comes to a close.
Bank of America top stocks
From the Bank of America list, here are some notable buy-rated stocks with earnings upside.
JetBlue, a discount airline, is one of the most well-known names on the list. The company has not yet announced the date for its third-quarter report, but 2020′s report was released in late October.
JetBlue’s stock has underperformed the market this year and has even fallen slightly in the last three months. The company’s forward guidance is likely to be a hot topic on its investor call, as analysts and shareholders look ahead to 2022, when the economy will be more fully open.
Boyd Gaming, a casino operator, is another reopening play on the list. The company is set to report third-quarter earnings on Oct. 26, and its stock has risen nearly 50% year to date.
Furthermore, all of Boyd’s casinos are in the United States. Some larger casino stocks have suffered as a result of a regulatory review in Macao, which has cast doubt on the future of foreign-owned casinos in that city.
Several banks are also on the list, including First Hawaiian and First Horizon. Earnings for major banks begin in mid-October, and rising interest rates may improve the outlook for bank earnings over the next year.
Lots of stocks on a cheap price
“I just don’t think there’s a compelling case to be made against stocks,” Nygren said.
“Within the equity market, we still see it as a two-tiered market,” he added. “There are several stocks that are extremely cheap, such as financials and energy, and several stocks that are extremely expensive.” “I believe the cheap stocks are cheap enough that a value portfolio today looks fairly valued.”
With decades of experience, Oakmark Funds’ Nygren is one of the best-performing value-focused fund managers on Wall Street. He has managed the Oakmark Select Fund since 1996 and the Oakmark Fund since 2000, both of which have more than doubled in the last year and outperformed the market.
Nygren favors Ally Financial and Citigroup among the financial stocks owned by Oakmark.
“I think the banks are really cheap, despite being good performers over the last year,” Nygren said.
Ally Financial “was a terrible stock in the early part of the pandemic, but it has made a really strong recovery,” according to Nygren. He added that after rising roughly 47 percent in 2021, it is now trading at about 8 times expected earnings.
Oakmark is also a buyer of Citi, which has risen roughly 13% this year. Citi CEO Jane Fraser, according to Nygren, is doing an excellent job of rebuilding the corporate culture and refocusing the major bank on the customer. He believes the stock’s return on equity will more than double in the next five years.
While rising interest rates are a growing concern for many investors, Nygren believes a rise in bond yields will benefit financial stocks as well as commodity prices, which will benefit the energy sector.
A number of major tech names have also piqued Nygren’s interest.
“We’ve got a more inclusive definition of value, adjusting GAAP accounting for what I call deficiencies,” Nygren explained. “So we own names like Facebook, Alphabet, and Netflix because we believe they are undervalued in terms of business value.” That has contributed significantly to the strength of our portfolios.”
Apple earnings estimates
Martin, one of Wall Street’s top tech analysts, has reduced her iPhone shipment forecast for the current quarter, citing problems in the semiconductor industry that appear to be impeding production for the tech giant.
“Based on our channel checks and press reports citing chip shortages and ongoing supply chain issues, we lower our iPhone 13 shipment estimates for calendar 4Q21 (ending Dec 31, 2021) by [10 million] units.” “We now estimate that iPhone 13 shipments will total [80 million] units in FY1Q22,” according to the note.
Martin’s lower estimates reflect the first full quarter of sales for the iPhone 13. Apple’s fiscal 2022 year began in October, so Martin’s lower estimates reflect the first full quarter of sales for the iPhone 13.
Martin also reduced her full-year revenue forecast for fiscal 2022 by 5% to $359.2 billion and earnings per share by 4% to $5.41. If those predictions are correct, revenue and earnings per share will fall by 1% year on year.
This year’s global semiconductor shortage has harmed manufacturing in a variety of industries, including technology and automobiles. Apple warned earlier this year that the shortage could disrupt the company’s supply chain. According to Bloomberg News, Apple will reduce its iPhone production targets due to a supply chain shortage.
Apple’s stock has fallen for four consecutive sessions and is up only 6.2 percent for the year.
Despite the lower estimates, Martin maintained her buy rating and price target of $170 per share for Apple.
According to Bloomberg News, the iPhone’s second-half production target may be reduced due to a semiconductor shortage and an ongoing pandemic. Apple had previously warned of supply issues earlier this year.
Shares of the hardware behemoth fell on Wednesday, and according to Bank of America analyst Vivek Arya, the news could also hurt companies in its supply chain — even those that are producing enough to meet orders.
“Regardless of the source of the constraints, Apple is unlikely to ship incomplete builds, with any downward production revisions affecting most suppliers,” Arya wrote in a client note.
Bank of America identified five chipmakers with at least a 20% stake in Apple, including Cirrus Logic and Broadcom.
“Given Apple’s strong smartphone market presence (15 percent global share) and 5G mix (80 percent -90 percent of sales), iPhone 13 cuts are most negative for CRUS (Apple 80% of sales) and RF suppliers (SWKS, QRVO, AVGO), which benefit from strong units and increasing content in latest generation devices,” according to the note.
Skyworks, which made the list of the most vulnerable stocks, was also downgraded on Wednesday by another Wall Street firm. Baird analyst Tristan Gerra downgraded the stock from outperform to neutral, citing smartphone supply chain issues as one of the reasons.
According to Bank of America, the semiconductor stocks with the least exposure to Apple are Nvidia and Ambarella.
On Wednesday morning, chip stocks were mixed, with the Philadelphia Semiconductor Index rising slightly. Skyworks and Broadcom both saw their stock prices fall.
Jefferies downgrades Wayfair
“While demographics and suburban migration will drive category growth, we see a tactical opportunity for investors to avoid a ‘air pocket,’ where demand falls short of high expectations and rising costs muffle profits.” “Shares are down more than 30% from their highs, but soft data has yet to be priced in,” according to the note.
According to Jefferies, despite Wayfair’s size and diverse supplier base, supply chain issues in Asia could still harm the company’s bottom line.
“A global, diverse supplier base provides better insulation versus peers, but the reality is that China still accounts for 50% of [cost of goods sold].” “Management has historically been conservative with [gross margin] guidance… so high investor expectations are a concern if supply chain costs are absorbed,” the note said.
