Supply chain worries loom large over the U.S. equity market, but money managers and analysts say certain companies could come out on top. High consumer demand, a tight labor market and Covid outbreaks have pressured global supply chains. Manufacturing delays, limited shipping containers, port congestion, truck driver shortages, and other supply chain issues are manifesting in higher input costs and lower inventory. "Generally speaking, every company that does not source all of their material and does not have complete vertical integration with trucking is going to have some level of supply chain constraints," BMO Capital Markets' Simeon Siegel said. "The question becomes, who can offset it?" Those who can combat it have one or all of these attributes: pricing power to pass on costs, diversified sourcing and the flexibility to quickly implement supply chain workarounds. Plus, some specialty sellers could capitalize on the chaos by reselling the inventory mistakes of the big players. Companies are raising prices to pass on higher costs to consumers, quarterly earnings calls show. Those with strong pricing power can protect profit margins — as long as customers are willing to swallow the elevated costs. As pricing power abounds, companies can differentiate themselves if they have more resilient supply chains than competitors. "In a world in which there is no inventory and therefore everyone has pricing power, there is a clear advantage for those that can get inventory and benefit," Siegel said. Costco Investors are raving about warehouse retailer Costco , including Nancy Tengler, chief investment officer at Laffer Tengler Investments, which owns the stock. "Costco has been able to stockpile inventory and buy it whenever it's available because they have a warehouse format," Tengler said. The warehouse model also means Costco can ship products directly to their stores, cutting out a middleman, said Parnassus Investments' Minh Bui, a senior research analyst who covers the name. "You can't change your supply change overnight, so if you already have that structure in place, then you can force additional levers to strengthen your supply chain," Bui said. Costco announced in September it would charter its own vessels next year to transport goods between Asia and North America. As companies aim to protect profit margins amid rising expenses, Costco's membership program also provides some cushion, according to Bui. "Because Costco has a membership program, they can afford to be later in the price increases, because they have that membership fee to offset some of those pressure on the margin," Bui said. Plus, while other companies scramble to fill open jobs, investors have noted Costco's reputation as a good workplace. Costco raised its minimum wage to $17 an hour at the end of October. "If you treat your employees well and you pay them well, it's easier to attract and retain your workers. You'll hear a lot about labor inflation or finding the right people for the job, and this is another competitive advantage for Costco," Bui said. Costco has a buy or overweight rating from 18 out of 25 Wall Street analysts covering the stock, according to FactSet. Shares of Costco are outperforming the market this year, up 36.9% in 2021 versus the S & P 500's 24.6% gain. Levi Strauss & Co. Levi Strauss & Co. is another stock well-liked on the Street. All nine analysts covering the stock have a buy or overweight rating on the shares, according to FactSet. The denim brand's supply chain came into focus on the company's third-quarter earnings call. Levi topped earnings expectations on its top and bottom lines, citing diversified manufacturing as a competitive advantage. "They really took a proactive approach in diversifying their supply chain a number of years ago," said Lori Keith, portfolio manager of Parnassus Mid Cap Fund, which owns Levi. Beating both profit and sales expectations in the third quarter is "a real testament to some of the work that they've done on supply chain," Keith said. The company does not source more than 20% of products from any one country and currently operates in more than 24 countries, management said on the earnings call. Vietnam, which has been severely impacted by Covid outbreaks, represents less than 4% of Levi's global volume exposure. Supply disruptions only suppressed Levi's revenue by less than $10 million during the quarter, the company said, a drop in the bucket compared with the company's third-quarter revenue of $1.5 billion. "We think LEVI is one of the few companies in our coverage best positioned to sustain momentum and drive revenue & margin expansion longer-term," Morgan Stanley's Kimberly Greenberger said in a note. Levi is also flexing its pricing power as the company manages rising cotton costs. The company's net profit margin in the third quarter is higher than the S & P 500's. "They're really leveraging their scale, their expertise, their strong relationships with their vendors to really protect their capacity and control their costs," Keith said. The denim stock is up 34.4% this year. Burlington Stores In the longer term, off-price retailers are poised to benefit from current supply disruptions as companies order as much inventory as possible ahead of the holiday season and shipments come in late. "The Off-Price retail business model is uniquely positioned to take advantage of imbalances in supply and demand and indeed goods remain plentiful along with open-to-buy dollars," Cowen's John Kernan said in an October note. Parnassus' Keith likes Burlington Stores as an off-price name and the firm's mid-cap fund owns the stock. Eleven out of 16 analysts covering Burlington rate the stock a buy or overweight, according to FactSet, while Burlington shares have lagged the market this year, up 12.4%. "As other full-line retailers try to pass along these prices, it will create more opportunity for Burlington to really shine in terms of their value proposition," Keith said. Analysts and money managers noted the performance of off-price retailers will depend on if the companies are able to acquire products and it may take some time for the supply chain environment to tip in the discounters' favor. "Longer term as we see, potentially, much of this delayed inventory coming over on the boats, that's going to create a really exceptional buying opportunity, as much of these items may no longer be really at the forefront of the current trends and they can really chase those items at a very low price that are still going to resonate very well with consumers due to that value discount," she added. BMO Capital Markets' Siegel said off-price retailers can either keep prices low to offer value to customers and drive revenue, or raise prices as the full-line stores do and drive profit margin. "The supply chain is not shut down, but it's slowed down," Siegel said. "Inevitably that's the type of environment that helps the off-pricers … albeit a slow process." —CNBC's Nate Rattner and Michael Bloom contributed to this report.
A cargo ship moves under the Bayonne Bridge as it heads out to the ocean on October 06, 2021 in Bayonne, New Jersey.
Spencer Platt | Getty Images
Supply chain worries loom large over the U.S. equity market, but money managers and analysts say certain companies could come out on top.