We know inflation's raging. We hear it from all of the companies that buy raw materials of any kind, whether it be fatty oils that you eat or oil that you burn, natural fruit or natural gas, it's soared in price.
You've got a consumer price index out just this morning that documents the pain, with a number that could burn asbestos, .9 on the blazing hot thermometer. Almost everything's up big that we buy from, once again, used autos, because new ones don't have enough semiconductors to be finished, to packaging and, worst of all freight, getting the product to the market.
So, what do you do, what can you do when you have the biggest inflation spurt in 13 years? Simple: You go buy tech. It's immune to the scourge of rising costs of all kinds, and it's also immune to the scourge of interest rate hikes, in case Jay Powell gets cold feet and feels like tapering or raising or even talking tomorrow about how inflation is stickier than we thought. Maybe inflation's not so transitory after all.
I know the market often seems unfathomable. But we have some huge and deliberate patterns that we can make tons of sense of and profit from.
This spring we had a furious rally in the industrials. They were called value stocks back then, but that's a silly name for them. Take Freeport-McMoRan (FCX) , our largest copper company often considered a value stock. It was at $12 in August of last year. It then rallied to $46. Hardly value. I can name 25 Freeports, so-called value stocks that just kept climbing as long as the Fed stuck with the transitory rap.
But on May 12, we got a similarly hot hot hot consumer price index number like this morning's and the industrials just got obliterated and the money immediately started flowing into highest growth tech. The so-called smart money insisted that Jay Powell relents on his stance and prepared themselves with growth stocks that thrive into economic weakness.
Sure enough, we got the same scenario this morning, in fact a little hotter even and the pattern repeated itself almost perfectly. Who says markets aren't rational?
Let's dissect a sample winner from today's action to show you what I mean: Alphabet (GOOGL) , parent of Google. We don't talk about this gem of a stock often enough -- up 45% for the year -- in part because the principals are painfully shy and in part because they don't care.
Let's consider Alphabet and real-life inflation, starting with the booming natural gas market and skyrocketing oil. Does Alphabet have an energy problem? Go to the query page you visit a dozen times each day. Did you ever look at the bottom?
"Carbon neutral since 2007."
I doubt they have any energy issues.
Do they have a problem getting the plastic they need, the boxes the need, or perhaps the fatty oils or liner board or bleach?
No, they are Alphabet. They don't have to worry about such things. It's an asset light, brain heavy model.
How about freight? Are they hobbled by a lack of truck drivers like all of the other consumer packaged good companies? No, they aren't, they don't ship. They just help you do things. How about those pesky ports? Do they have important materials waiting on ships to be unloaded, late already because one of the chief ports in China has been struck by absenteeism from COVID? Maybe some of the employees have shirts made in the PRC or flip flops, but otherwise, no. Are they bothered by the force majeure for key elements of paint? Nah, they don't paint anything. I've been out there. A lot of the walls aren't even painted.
It's a bonanza of non-inflation!
You see the breakout in Microsoft's (MSFT) stock today? You think anything happened there today? It's more of a celebration of nothing, as it has no raw costs of any meaning to their bottom line. We went out to see Microsoft when it unveiled a plan not to be carbon neutral but negative. Carbon negative companies are not about to be hurt by energy costs. We know that packaged food company Conagra (CAG) , which cut numbers in large part because of rising costs had their biggest problems with edible fats and oils. I'm not seeing that kind of pressure at Microsoft. Maybe in the cafeteria? While PepsiCo (PEP) had an amazing quarter, more on that in a moment, it had a critical driver shortage. I don't know if Microsoft has any drivers. Maybe for security or to shuttle people around the campus?
Or how about Apple (AAPL) ?
It's got a fabulous brand name, so fabulous that most companies would give their interns' right arms to partner with them. Goldman Sachs (GS) reported today and they spoke lovingly of their partnership with Apple for an Apple credit card and then later in the day announced a buy now, pay later plan, one of those that are wildly popular and should spur sales. Apple's got a lot of upside, no downside. Now Apple does have some raw costs, mostly materials. But they have customers like the big cellphone companies that eat the costs in their price wars for customers. Not much of a supply issues. They have been loyal and large customers of tons of ever expensive metals but their products are perceived as a necessary luxury for any home office.
Which brings me fill circle to PepsiCo. This morning the carbonated beverage, energy drink and Frito Lay purveyor reported a monster good quarter, even as it had plenty of inflation issues throughout its entire supply chain. So how in heck could they still have a good quarter? Because they have incredible brands that they can raise prices ever so slightly and nobody will rebel. The stuff will still sell.
That said, when you have a steamer of a CPI, you can't bet that everyone can handle the inflationary pressures. You also can't bet that everyone will handle a sudden rate increase. But with this earnings season only a day old we have already heard from a dozen companies and each one talks about how it had to spend money and time digitizing. You can hope they got it right and put through the changes, or you can buy the digitizers. To me it's a pretty easy question to answer.