It's all about the chips.
On the hand, we have enough chips to create a bang up quarter for PepsiCo (PEP) . On the other hand, we don't have enough semiconductors for anyone, for every single company that depends on them, and that means any company with any sort of complexity -- from earth-moving machines to cellphones and personal computers.
Now, we don't want to simplify too much of course. There's some metaphor involved here. Or is it simile? Whatever. The fact is this market has turned to chips, the wrong kind of chips, potato chips, as well as chocolate, ketchup and beer and has turned its back on technology in general and users of semiconductors, specifically, as a shortage of the complex kind of chips has wrought havoc through what is now a substantial part of the stock market. And when the market flees tech, it tends to go right back to the safety stocks of which one of the biggest is the maker of Frito Lay's potato chips, PepsiCo. They are as about as low-tech as it gets; I mean, I grow potatoes, and all they require is some dirt and some old potatoes with eyes on them.
But let's talk about the chips when they are down. For years we have embraced companies that have gone digital. Anything that is simply mechanical is viewed as a loser, when matched against a digital opponent. But to get digital, you need semiconductors and you need a lot of them, so many of them that you may actually exhaust the supply.
We all know the story of how American companies long ago went to a just-in-time strategy for their supplies while the Chinese went for a just-in-case method of operation. There are all sorts of semiconductors from expensive, where the profit margins are big, to plain old commodity, where there's really not enough profit to build new foundries.
It's the latter that's causing the problem, and we've been forever hopeful that somehow our companies would have some sort of supplies on hand to avoid a debacle. In the last 24 hours, we have discovered that many of our companies have been laid to waste by the shortage and many others are predicting that it could happen to them next.
Every day, we have a chip casualty. Thursday we had three: Ford (F) , Caterpillar (CAT) , and Apple (AAPL) , which reported an astonishing quarter Wednesday. All three were attenuated, but it didn't matter. Apple gave us a quarter for the ages, one that when I saw it, I thought I was looking at future projects not registered numbers. Some of the divisions were electric, like Macs and iPads. But they are chockful of chips, as is so much of their line-up. Now, some could argue that it went down, because it's as good as it can get. But how do explain the extraordinary moves in Alphabet (GOOGL) and Facebook (FB) ? They wouldn't have run if it were as good as it gets. They just happen to be techs that don't get hurt that much from the shortage. Oh, and they both reported numbers that could truly put them on another plain, as they shared relatively low price-to-earnings multiples.
Caterpillar? One of the reasons why I love, love, love my Caterpillar backhoe is because the electronics make me feel like I know what I am doing. It's a spectacular machine that is loaded with chips, digitized to the max. The stock didn't get hammered because of the quarter, it got clubbed because of the raw materials that go into my backhoe, steel and semis. Jim would have to have eyes behind his head and backhoes that can see around the corner to have guessed this could happen.
And then there is Ford. This one got hit, not once, but twice from the chip shortage; the first, because the Chinese had double-ordered so many chips at the same time that our automakers thought the pandemic would wreak havoc with their sales, and the second time, when a terrible fire destroyed the foundry of Renesas Electronics, which is responsible for about one-third of the chips that go into autos.
I believe the first fiasco was so-called "in" the stock. But the second one, the conflagration, which will not be rectified for several months, was a body-blow too much, and Ford's stock's down on the canvas.
Most of the time metaphor makes for lousy investing, but out of nowhere we have had as string of excellent quarterly reports in the food group that, with the drug stocks being crushed for some terrible earnings and the semis hurting all things digital, truly shined. PepsiCo reported during the heyday of tech, and no one cared. They did Thursday. Mondelez (MDLZ) and Hershey (HSY) just reported some terrific numbers, too. While we are at it, lets throw in Domino's (DPZ) , which once again exceeded expectations.
Now, I had the good fortune to be part of a truly fun experience Thursday, CNBC's annual stock draft, where contestants pick the stocks that they thing will be the highest come next year's Super Bowl. If you stay tune to "Mad Money," you can hear my pick, which will no doubt shock you, but one thing is certain, by that point capitalism would have fixed the chip shortage and, while not as prevalent as Frito Lays, you will be abundant enough for you to stay in the game and in the three stocks I just mentioned that have been most impacted.
It's ironic. You would have thought that with the President of the United States' taking aim at the wealthy, the class that owns stocks, you would somehow expect that the market would roll over. I have to say that's an attenuated way to look at things. The rich, when faced with higher taxes, don't sell stocks to be able to batten down the hatches against the taxman. But, they do like to reposition themselves. If they were to do so, it would be synergistic with the with potato chips -- not the electronic ones -- because they have dividend income galore and that there are no plans to raise the rates on dividend taxes. As we said, that's the lone tax break available.
Do I think you should sell the non-edibles for the edibles? Absolutely not. But I do think that it shows you why you need a diversified portfolio that gives you a shot at both capital gains and income of the low taxed kind.
The Link LonkApril 30, 2021 at 06:01AM
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Jim Cramer: Let's Dig Into the Chips - RealMoney
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