It's time to rebalance your portfolio for the economic shift in demand towards the proclivities of the
new normal. Society digitalized 10 years in just 10 months amid the pandemic, fueling a new vein of demand powering the next generation of equities.
The balance between supply and demand drives pricing in every corner of the economy. From ride-hailing to housing to the stock market, the value of any asset, good, or service is derived from the equilibrium price in which supply and demand meet.
Demand is outpacing supply in so many economic sectors putting enormous pressure on prices across the board. It is crucial to allocate your portfolio's holding towards spaces of erupting demand in this rapidly advancing economy.
FedEx ( FDX Quick Quote FDX - Free Report)
The dust has settled on FedEx's (
FDX Quick Quote FDX - Free Report) post-earnings liquidation, and it looks like this falling knife has finally run out of sellers. Buyers are coming back into FDX as analysts' optimism surges into this delivery powerhouse.
FDX marginally missed EPS estimates in last Thursday (6/24) evening's fiscal year ending report (fiscal year ending in May) due to continued integration costs from its European subsidiary, TNT Express, and adjustments made to its mark-to-market retirement plan accounting for TNT Express's pension plans. This catalyzed a 4% knee-jerk sell-off on Friday following a quarter that had solid underlying fundamentals.
FedEx record shipping volumes drove its largest quarterly revenue figure in the company's long history. Even though the enterprise missed earnings estimates in Thursday evening's quarterly release, analysts raised their EPS projections for the coming years, driving this stock into a Zacks Rank #1 (Strong Buy).
Despite tech's reclamation of market leadership, it is prudent to purchase value-driven cyclical plays on dips, and FDX is the perfectly positioned equity for a buy.
Freight in The New Normal
FedEx has been experiencing accelerating freight volumes from the global lockdowns that forced the world to operate from home, driving seemingly unending demand for efficient package delivery. This demand growth isn't going anywhere as rapidly digitalizing commerce space is only starting to take off.
The global lockdowns have conditioned society to utilize the ease & convenience of online shopping. The
new normal in which we live will depend on freight giants like FedEx more than ever before. Speed is becoming an increasingly important demand from customers, and FedEx is well-positioned to take on this growing requirement as the world's largest express transportation business, delivering more than 6.5 million packages daily.
FedEx isn't sitting idle in this rapidly digitalizing economy with its acquisition of ShopRunner at the end of 2020. ShopRunner is a subscription-based service that "directly connects more than 100 brands and merchants to millions of consumers and offers a seamless shopping experience from inspiration through delivery. ShopRunner's data-driven marketing and omnichannel enablement capabilities also help brands and merchants acquire high-value customers and accelerate their digital innovation by using ShopRunner's e-commerce platform," according to a FedEx press release on the matter.
FDX has been weighed down by its European acquisition of TNT Express since the beginning of 2018. This European subsidiary was meant to swiftly expand FedEx's international footprint, but TNT suffered from some margin pinching issues.
It appears that FedEx has finally ironed out the problems within this European business and this once deadweight loss now looks like excellent exposure to the international economy. Europe is recovery slower than the US from the devastating medically induced economic coma but has an enormous amount of growth ahead of it. FedEx's international operations position it to be a vital beneficiary of this continued recovery.
FedEx is trading at a significant discount to its biggest competitor, UPS, with a forward P/E of 14.25x, compared to UPS's 18.88x multiple. FDX's post-earnings dip is the perfect opportunity to start a position in this resurging business, with double-digit earnings growth expected over the next couple of years.
Taiwan Semi ( TSM Quick Quote TSM - Free Report)
Taiwan Semiconductor Manufacturer Company (
TSM Quick Quote TSM - Free Report) is the backbone of the 4th Industrial Revolution. A profusion of global capital is pouring into chip innovation & capacity to meet the unending demand and society's invigorated propensity for advanced technology.
TSMC is the largest semiconductor manufacturer globally, producing 56% of the world's chips, with cutting-edge capabilities that are unmatched in the space. Amid this global chip shortage, TSM is the best-positioned fabricator in the global economy.
The most trusted tech giants turn to the most reliable semiconductor foundry for their manufacturing and innovative needs. TSMC's customers include companies like Apple (AAPL), Nvidia (NVDA), Broadcom (AVGO), Qualcomm (QCOM), and even Intel (INTC), which has been unable to keep up with the innovative curve in chip fabrication, which TSMC continues to push higher.
The Opportunity In Chips
Chipmakers have been experiencing the same valuation multiple compression that has plagued the broader tech sector since mid-February. Investors have been pulling profits from the massive rally that semis had seen since the pandemic lows. Soaring interest rates and inflation expectations have catalyzed recent selling pressure along with portfolio rotations into the cyclical plays as the economy swiftly recovers.
Many analysts have been hesitant about adding tech back into portfolios, even at discounted levels. Still, there seems to be a common consensus that chip stocks are one of the few growth segments worth moving on now as a long and short-term play. As a result, we are seeing momentum reenter this technological vertebra as investors rush to their favorite chip stocks.
The global chip shortage has had rippling impacts on numerous sectors of the economy, forcing automakers to reduce manufacturing and even completely halt it in some cases. This is an excellent position to be in for chipmakers, where demand outpaces supply. Investments are pouring into this space, and it looks like the demand will only grow in the increasingly digital world that we live in today.
US lawmakers just passed a sweeping bill in the Senate that authorized $190 billion to support the country's most essential advanced technology and address the China threat in tech. An additional $54 billion is being separately approved to produce and research semiconductors and telecommunication technology.
Semi stocks are on their way back to all-time highs after bouncing off some key support levels in May. I anticipate this space to outperform the broader tech industry in the coming months.
TSMC US Operations
This enterprise has started construction of a $12 billion factory in Arizona to manufacture leading-edge 5-nm transistors chips as soon as 2024. An atom is 0.1 to 0.5 nanometers, only about 10x smaller than these transistors (less than 10x smaller than its 3nm chips, which will begin fabricating as soon as next year). So TSMC is literally working on the atomic scale.
TSMC has 5 more Arizona facilities in the pipeline, which are a part of a 10 to 15-year plan to ramp up US production. With China at Taiwan's doorstep, the US is more than anxious to get this company's highly esteemed operation and facilities on its soil. I have a strong feeling that a sizable portion of this $54 billion chip subsidy (when passed) will go to TSMC to do so.
Skyworks Solutions ( SWKS Quick Quote SWKS - Free Report)
SWKS is finally breaking out of its 2-month trading slump, having soared 13.5% from the beginning of last week. The shares took flight this week following a slew of analysts getting bullish on Apple's chip suppliers as the business prepares to release the new iPhone 13 this fall. The demand for 5G technology is taking off, and Skyworks' essential 5G mobile communication chips are positioned to catch a massive tailwind.
The next 5G iPhone release and other leading 5G devices will continue to be a sizable tailwind for this stock. Skyworks' Sky5 chip portfolio is accelerating with next-generation 5G, "supporting the next wave of 5G launches at Samsung, Oppo, Vivo, Xiaomi and other Tier-1 players" (aka Apple (AAPL), it's #1 customer), according to its latest quarterly release.
The 4th Industrial Revolution is upon us, and connectivity is becoming a central focus as 5G technology rolls out. Skyworks (
SWKS Quick Quote SWKS - Free Report) and its growing portfolio of digitally connected chips are essential components to the 'smart' world we live in. Business spending is taking off, and the focus will be on building out digital infrastructure, providing a nice tailwind for this well-positioned chip giant.
Today almost everything we interact with is digitally linked to the internet, also known as the internet of things (IoT) ecosystem. 4G networks weren't built to handle the volume of data or required speed of this rapidly expanding connected device ecosystem. The 5G revolution is an essential transition to allow our increasingly 'smart' world to function in real-time.
Skyworks' cutting-edge chip technology is critical for the ushering out of 5G devices, and its latest quarterly reports really illustrated the vitality of this enterprise. The company's vision of
Connecting Everyone and Everything, All the Time is coming to fruition, and analysts are getting excited. Final Thoughts
All three of these stocks have controlling positions in their respective spaces. As demand overtakes supply, these businesses have pricing power in this inflationary environment and are on the precipice of a topline explosion. These best-in-class enterprises are ramping up capacity to power profitable growth. The relatively reasonable valuations that these stocks are trading at positions each of them as a long-term buy today.
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