One of the key variables for investors, economists, consumers, and policy makers over the past few years has been the rate of inflation. It has been a challenge for some companies’ earnings, while providing a boost to others—perhaps none more so than processors, distributors, and other middlemen. As prices rise, so does their take.
What comes next? Inflation has slowed meaningfully from 2022 levels. Goods inflation has been particularly weak as supply chain snarls unwound and a hangover followed the pandemic spending glut. Accordingly, the rally in distributors’ stocks has stalled in recent months after a strong start to the year.
But that cuts both ways. When demand and pricing are weak, margins can contract and inventory on hand may need to be marked down. Distributors’ stocks tend to fall early when the economy tips into a recession, then lead on the way out. A decent parallel was in late 2015 and early 2016, when the broader economy was strong but manufacturing sectors fell into recession. Back then, the manufacturing PMI was in contractionary territory for several months in a row, but never fell below 47.Three distributor stocks are cheaper today than their five-year average and during the last period of manufacturing PMI weakness: Beacon Roofing Supply , Genuine Parts Company , and Wesco.
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