Globalization of supply chains is 'the big difference' driving inflation today, strategist says
F/m investments' Francisco Bido joins Yahoo Finance Live to discuss expectations for Thursday's CPI number, supply chain disruptions, U.S. inflation, and the outlook for the 2022 stock market.
- Well, as we were just talking about with Rick Newman, inflation is an acute problem for consumer sentiment right now. And it's being felt everywhere. We've been talking about it a lot today, executives from Chipotle, from Taco Bell talking about inflation and the effects that it's having on their businesses. How should it affect how you're thinking as an investor?
Francisco Bido is with us, Head of Quantitative Research and Portfolio Manager at FM Investments. And Francisco, it's especially good to talk to you ahead of tomorrow's CPI number, which is expected to be another hot read on inflation. So how are you factoring it into your investment decisions? And are you expecting it to be at this elevated pace for the foreseeable future?
FRANCISCO BIDO: Well, thanks for having me, Julie. I do expect for the foreseeable future to stay elevated around 7%, maybe go up to 8%, but not much more than that. I think that what we experienced is basically a supply chain disruption. It's a complicated problem, as priorly mentioned. But in my opinion, you know you didn't see the inflation back in the '90s.
And the big difference is that globalization, we don't talk about that much. It's taken for granted. Back then we have the outsourcing in China as the manufacturing base and all that right. All of a sudden, that gets disrupted, and we do see inflation. So in my opinion, that's where it comes from.
But in terms of stock picks, in terms of what to do about it, then we tend to focus on companies that have pricing power. And that comes from a number of different places. It could be number one, because the companies have a long queue of customers, they could be innovators, and they can also be just regular old companies at a great price right, maybe provide a dividend and so on.
So let me talk about pricing power. In that category, we like Home Depot. Home Depot has the ability to pass some of the costs of the raw materials to their customers. I also like Intuit. I don't remember the last time that I did my taxes, my TurboTax, that it didn't go up on me. I have to do my taxes. I have to do my taxes, and every year, it's a little higher. So they obviously have some degree of pricing power.
So those are companies that tend to do well in an inflationary environment. We like to focus on the ones that have earnings and revenues acceleration. And for that, if you look at the innovators in that category, there's Apple computer, or Apple, Inc-- sorry, I'm an old guy-- and also AMD, AMD as well.
These are companies where the pricing power comes from the fact that they can come up with new products, or they have a very loyal existing customer base. And in the case of AMD, they got the server chips and so on. And all this talk that we hear about metaverses and things of that nature, at some point it's going to lead-- it's the secular demand for chips. Everybody wants chips.
- Francisco, I just want to go back to what one of your picks on Home Depot, because it could be indicative of many other stocks in this market. Are you concerned about interest rate risk with a company like that, just given how tied they are to housing, and perhaps housing might slow down if we get five or six rate hikes this year.
FRANCISCO BIDO: That's correct. And my advice would be to anybody, you know, listen to my stock picks. That's fine. I'm sharing from my heart. But on the other hand, you should build a good portfolio. So you can't put all your eggs in Home Depot. You might want to look at other things as well.
Yeah, there is that interest rate risk. And you might want to diversify that a bit. You might want to have some utilities. You can find some of those at a good price, or even a CarMax. Part of the outcome of the short of of the semiconductors, that used car prices are high. So you may want to look at CarMax as well. But again, focus on your portfolio. Build a good portfolio of stocks. And any particular name you increase, you get more risk that way.
- And let's also talk more about large cap tech. You mentioned AMD. I know that you're looking at a couple of the others, Apple, Amazon. And it's been an interesting earning season for these large cap tech companies, hasn't it? Because we have really seen a divergence in the companies that have beat and the companies that have missed. It looks like you're on the beat side of the equation with these picks here. But what do you think the rest of the year looks like?
FRANCISCO BIDO: Oh, I think the rest of the year is to some extent, somewhat-- it's going to be noisy. There's just too much going on, including with the geopolitics and oil prices and whatnot. But I believe the rest of the year will be favorable to tech.
Tech got some love towards the end of last year. But it could have gotten more love. And I came on the show last summer, I believe, and I did mention that techs were somewhat underappreciated. They got some love in November. They got some love this year. But I think they need a lot more. Techs are in a secular trend. And I think there are good holdings long term.
Short term, anything can go in the short term. I tend to be a long term investor. So I like to look at the long run. And that's not to say that I won't look at any tactical opportunities with inflation or anything like that. Sometimes you can find that intersection that is both a good play for the next couple of quarters and that's a good play a year and a half from now.
So the large tech really suits that bill. Amazon in particular, they beat their earnings. They're have pricing power. Again, to my example, they can raise the prices of the prime membership and so on. So that kind of company tends to be a great company to own under an inflationary environment.
- Yeah, and to your point, Apple certainly has shown it historically has pricing power as well. Francisco, good to catch up with you. Stay well. Francisco Bido, Head of Quantitative Research and Portfolio Manager at FM Investments Thanks again.