This morning over a cup of Dunkin Donuts iced coffee I started to think about a potential deflationary trend that might occur in the public markets over the next 12 months. It’s quite possible commodity prices come back to normalized levels and once beaten down commodity sensitive companies could receive a large tailwind. I know this is antithetical to my main overarching theme that there is too much debt and cheap money in the global economy and hyperinflation is bound to tear down large standing powers. But hear me out.
Over the past few months commodity prices have fallen and it appears as if the market is pricing in further reduction in pricing. Crude oil was down 8% today to $95/bbl. US natural gas is down from a high of $9.23/MMBtu in June to $6.20/MMBtu today. Gold has fallen substantially. Silver is under $20/ounce. Cotton has collapsed 60%. In fact, pretty much every commodity that you can think of has seen a dramatic pullback in pricing, suggesting there could be a deflationary tailwind coming.
I’m a fan of buying beaten down assets. I’m a bigger fan of buying beaten down assets with a short-term tailwind. I’d rather make 50% over a 6–12-month period than a 2–3-year period. I mean who wouldn’t? Now I don’t claim to be a macro forecaster. If I wanted to waste time it would be the bar, not forecasting the global economy. But I do like to think in terms of trends with the economy and how they could affect small and microcap stocks.
To start this exercise let’s first make a list of commodities that have fallen:
US natural gas
It should be noted that most of these commodities are still near record highs, but the price has fallen and there could be additional tailwinds for companies effected by higher pricing. If pricing keeps falling and you see substantial tailwinds on the horizon for commodity sensitive firms.
Now let’s list a few industries that could be affected positively by falling commodity prices per each commodity. Feel free to comment below other industries that could be positively affected by falling commodity prices. These lists are not exhaustive.
Shipping and freight
Any company that uses a substantial amount of air-conditioning
Anyone importing from China
Anyone that uses steel
Macro forecasting is impossible. Betting on what the global economy does next is a losing man’s errand. But figuring out what small companies could benefit from falling commodity prices, isn’t impossible.
I’ve created a list of a handful of companies that I think could benefit from falling commodity prices below. I’ve done a lot of research on a few of these names. And a few of them are still new to me. Over the new few weeks I will be digging into some of these names and exploring some of the potential deflationary opportunities there could be had in the market.
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