Typically, when a major newspaper takes a major trend and turns it into a story, we must be cautious. By the time retail investors are focused on a trend, it has reached the point of saturation.
Think about it. Have you been in a restaurant and overheard someone talking about vaccine stocks or GameStop? That’s usually a sign that things have reached their peak. Typically, we want to move on to the next trend instead of holding the bag after institutional investors sell their stakes for big gains.
But then there’s the supply chain crunch. We might only be in the fourth inning of this story. Ships are backed up around the globe. The cost of sending freight is reaching new heights. And I finally had a chance to see it for myself.
Check out this picture.
One of our writers took this picture while flying into Baltimore yesterday. Those are cargo ships with dozens of recreational boats zipping around them.
This is a freight backup in the Port of Baltimore. There were more than 10 ships waiting for the opportunity to unload. I have to stress this: I’ve lived in the Baltimore area my entire life, and I’ve never seen this before.
So I can only imagine what the ports in California or New York look like today.
We want to make money, right? We want to trade strong stocks that are enjoying a positive trend. Well, I’m ready. Are you?
Let’s tackle the global freight crisis right now.
Freight is Great
The numbers speak for themselves. We’re in a global supply chain mess.
About 18 months ago, it cost just $2,000 to move a shipping container from Shanghai to Los Angeles, according to AJB Capital Research.
Today, that number is north of $16,000.
That’s a 7x jump in freight rates over the last 18 months.
But it gets even crazier. You see, not only have prices jumped, but so too have lead times on all shipments. In the last two weeks, we heard both Nike (NKE) and Costco Wholesale (COST) state that their shipping lead times have doubled from pre-pandemic levels.
Now, we can get into all of the factors around why shipping costs and times have increased. But I’ll keep it short. Companies grossly underestimated the economic recovery from the pandemic, for good reason. This was an unprecedented event, and it was smarter at the time to reduce manufacturing and inventory levels than it was to expect a V-shaped recovery.
Second, not many investors anticipated a shortage of labor or available ships to move products. Remember, companies like Costco are now leasing ships to ensure that they can guarantee delivery of products over the next 12 months.
Third, companies were caught flat-footed by the dramatic bidding war on freight services as we progressed through the year. The expectation was that more ships would be online and available. But there weren’t enough ships and containers. We are now in a seller’s market on freight, and this could accelerate through the end of 2022 if no dramatic change in capacity happens.
Here’s How to Trade The Global Freight Sector
Let’s be honest about the current state of the freight sector. The global shipping stocks have already surged to record highs this month. I do like playing along with the momentum of these shipping stocks, but I don’t want to lose too much money. So I recommend that investors define (and then follow) the amount of risk they are comfortable with in each position.
There’s a stock that I think has an upside of 25% in the next six months: Atlas Air Worldwide (AAWW). This is a global air freight company and a massive holding of activist hedge fund manager Bill Ackman. As we approach the holiday season in the middle of a supply chain crunch, the company can and will benefit from rush orders to move products all around the globe.
Not only can the company increase its rates to ensure delivery, but it also has a massive negotiating advantage with its customers. You see, in the dog-eat-dog global supply chain, shipping companies are looking for any advantage they can use to guarantee long-term loyalty to their services.
As we speak, companies that can ensure delivery over the next few months will demand that customers sign longer-term contracts. So, not only are they locking in incredible rates right now, but they are ensuring that they have sales in the future. This enables them to project stronger cash flow, use their solid balance sheets today, and borrow more money to then expand their business.
AAWW is in a positive momentum uptrend and has been in the Green Zone on TradeSmith Finance for more than eight months. Not only do I like this stock as a buy and hold, but it also opens up many different ways to trade options.
This week, I’m going to focus on two things. First, how to trade options on a stock like AAWW. And second, another part of the supply chain that creates incredible upside. I look forward to discussing both with you.
