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Cigarettes, iPhones, and Solar Energy: Connecting Macro Trends with Individual Companies

28 April 2008 3 Comments

When looking at specific companies to invest in, there are many factors to consider and research. These factors can be internal characteristics of the company such as management, product line, and growth strategy. There are also external or macroeconomic factors that can impact a stock performance.

While it is important to understand the macroeconomic picture related to the company you are invested in, it is important to note that well run companies can outperform even in an environment that seems to work against the company. Conversely, some companies can under-perform in an environment that is trending in favor of the company. Let’s look at some examples:

Under-performing companies in a growth environment

One of the most well known examples of individual company performance inversely related to the related growth trends is the dot-com bust at the early part of the decade. During this time, the internet sector and most of its related companies lost a vast majority of their value in just a short period of time. At the same time, the internet and its popularity continued to grow at an astounding rate. The lesson that most investors hopefully learned is that just because a company is operating in a hot sector, one that most believe is bullet proof, it does not equate to endless returns.

Where can we apply this lesson today? One area might be solar energy stocks. With all the coverage surrounding global warming, the green campaigns, and the high commodity prices, the alternative energy case has never been stronger. In this environment it would make sense that alternative energy companies, specifically solar energy, would thrive.

The solar stocks have had an impressive run in recent years with massive gains. A few of the solar all-stars are First Solar (FSLR), MEMC Electronic Materials (WFR), SunPower Corporation (SPWR) and Evergreen Solar (ESLR). A quick glance at these companies reveals extraordinarily high price to earnings multiples. If you are looking to take positions in these stocks, do plenty of research on the actual companies and put a large chunk of your portfolio in solar. The solar boom may not end like the dot-com boom, but don’t assume these companies are sure bets based on the popularity of solar energy.

Outperforming companies in a weak environment

Two of my favorite stocks are Altria (MO) and Philip Morris Int’l (PM). While tobacco use has been trending down domestically and in other regions of the world for years, both of these companies (recently split) continue to perform. These companies have stellar management dedicated to returning value to shareholders through such ways as high dividend yields and buyback programs. While the domestic tobacco market continues to shrink and the environment continues to be filled with litigation issues, Altria is taking action to cut costs and find new growth channels. Philip Morris Int’l is poised for tremendous growth while launching widely recognized brands such as Marlboro into new markets. Both stocks should be considered for your long term portfolio.

In the current economic environment, there is tremendous pressure on the consumer. Inflationary forces have caused every day food and energy costs to skyrocket while the domestic growth slows and job market contracts. A company that designs, manufactures and sells consumer products would undoubtedly do poorly in the current environment, right? One company that is fiercely bucking that trend is Apple (APPL). Apple’s superior management continues to deliver explosive growth with multiple innovative product lines. Apple proves that they can not only survive an ugly economy with superior products, but they can gain market share and continually deliver dazzling profits.

What about the commodity boom?

The boom in commodity prices has definitely translated into increased profits for the companies poised to benefit from higher costs. Oil companies have seen record profits and agriculture companies such as Monsanto (MON) and Potash (POT) are hot. The question is this: with many predicting the continuation of higher commodity prices, will these companies continue to outperform?

I believe that, in many cases, you have already missed the run with these companies’ stocks. If you are a believer in the supply and demand fundamentals that warrant high prices for commodities such as oil, then you may want to consider investing in the commodity itself rather than the related stocks. Jim Rogers, who predicted the commodity boom, continues to argue that you should put your money in commodities and not stocks. An easy way for investors to invest in oil is through the United States Oil ETF (USO).

To summarize, it may be less risky to invest in the commodities themselves than the companies that benefit from higher commodities prices. Individual companies can be affected by poor leadership decisions such as bad investments and weak strategy. Commodities are driven by fundamentals over long periods of time.

What are we to do with all of this information?

Remember– the macroeconomic trends that impact a company are a factor, but they are not the only factor and they are not the most important factor. Strong companies with great management like Altria can outperform in any environment. Special companies like Apple innovate at such high levels that their products fly off the shelves no matter how weak the status of the consumer may be.

When building your portfolio, don’t settle for companies that have run up in price simply because of the latest and hottest trend. Build positions only in companies that have solid management that is steering the company in a clear direction with a sound strategy that will perform regardless of economic conditions. This, my friends, is the path to building wealth.