Supply Chain Analysis When Investing in Stocks

Jun 8, 2021 08:19 PM ET
Supply Chain Analysis When Investing in Stocks

Supply chain analysis is the process of looking at a company through the lenses of its suppliers. This is a common type of analysis among institutional investors and experienced traders. In this article, we will look at what supply chain analysis is and how you can do it well as an investor or trader.

What is a supply chain?

The world of business is a highly complicated one. Let’s look at Apple, for instance. The company sells products like iPhones, MacBooks, and Apple Watches, among others. 

While a substantial amount of revenue these days is coming from services like Apple Music and iCloud, the company still makes most of its money from the iPhone.

There are several angles to look at when you are conducting a supply chain analysis for the iPhone. The most obvious is Foxconn, the Taiwanese company that assembles most of the iPhone. You can also look at companies like Corning and Samsung that supply Apple with screens.

Further, you can also look at companies like 3M and Broadcom. In total, Apple has hundreds of suppliers. The same is true with companies like General Motors, Ford, and Intel. According to Bloomberg, there are more than 800,000 supplier-customer relationships in the world.

Meanwhile, you can also look at supply chain analysis on the basis of commodities. For example, in 2021, American homebuilders saw thinner margins because of the lumber prices, which rose by more than 300% from 2020. 

The chart below shows the key suppliers and buyers of Intel.

Intel supply chain analysis

Intel supply chain analysis

Similarly, companies like Caterpillar and Deere were partially affected by the rising commodity prices. At the same time, the energy sector outperformed the S&P 500 in 2021 as the price of crude oil rose. 

Vanguard Energy ETF vs S&P 500

Vanguard Energy ETF vs S&P 500

The chart above is a comparison of the Vanguard Energy ETF with the S&P 500 index.

Example factors in supply chain management

There are several factors that investors can look at in supply chain management. Let’s look at some of the most popular ones.

Tariffs

Tariffs refer to levies that countries levy against each other. For example, a few years ago, President Donald Trump implemented several tariffs on key industries. He started with tariffs on steel and aluminum. After these tariffs were implemented, shares in many companies with exposure to these metals like Caterpillar, Ford, and General Motors lagged because of high-cost fears.

Natural factors

Many natural factors like hurricanes have an impact on many companies in the supply chain. For example, Hurricane Harvey had an impact on oil distribution in the United States. This pushed oil prices higher, which had an impact on companies whose profit margins are affected by oil prices. Similarly, there were supply issues during the Japanese earthquake.

Trade deals

Trade deals have an impact on supply chains and many stocks. For example, shares of American automakers like GM, Fiat Chrysler, and Ford rose after the US, Canada, and Mexico passed the revamped NAFTA plan. This deal ended the uncertainty that Donald Trump would close the Mexican border. 

Similarly, the Brexit deal between the UK and the EU had many supply chain issues. For example, companies like Rolls-Royce and Airbus would have been affected because of how closely related they are.

Maritime issues

Another common issue in supply chain analysis is maritime issues. For example, in 2021, global supply chains were affected when a large ship blocked the Suez Canal. That blockage affected many companies, especially those in the oil industry.

There are other factors to consider when doing a supply chain analysis in stocks like commodity prices, workers’ strikes, and fires, among others. 

How to do supply chain analysis in investing

You now know the benefit of supply chain analysis as an investor. The most obvious factor is to know more about the biggest suppliers of companies that you are investing in. Also, you should know about the biggest commodities that are used to manufacture your products. 

For example, when looking at a company like Boeing, it is easy to know that engine suppliers like General Electric and Pratt & Whitney are the biggest suppliers. Similarly, when looking at companies like Archer Daniels Midland, investors should be aware that share prices will mostly depend on agricultural commodity prices.

Further, when investing in Apple, it is possible to find out that some of its suppliers are companies like Corning and Samsung.

Therefore, if a leading Apple supplier reports a strong quarter, it is usually a sign that Apple did well. Similarly, if a company like Foxconn reports a weak quarter, it is a sign that Apple likely underperformed. Still, you should also do a supply chain analysis for the company to see the amount of money it makes from Apple and other companies.

For many companies, however, doing a supply chain analysis is not easy. Therefore, there are several platforms that offer this supply chain analysis data. The most advanced package on supply chains is in the Bloomberg Terminal. However, this is software that goes for $2,000 per month, meaning that it is not affordable to many investors.

Yahoo Finance is another popular platform that offers the service at a relatively affordable price. Yahoo Finance premium goes for $25 for the lite version and $35 for the premium version. Other platforms that can help you with this are Refinitiv and Money.net.

Summary

Supply chain analysis is an important part of the fundamental analysis because stocks are affected by the performance of companies that supply to them. Similarly, companies are affected by commodity prices and currency issues. In this article, we have looked at the importance of supply chain analysis and some of the top places to get the data.

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