Investors in 2022 have contended with a war messy war Eastern Europe, worldwide inflation, and supply chain bottlenecks. It’s been a tough slog, yet there are better times ahead.
The world is shrinking and expanding at the same time, which is confusing on the surface but makes a lot of sense if you think about it. Deglobalization (shrinkage) means more steel mills, mines, and factories (expansion). It also means opportunities for consultants and semiconductor design firms.
Investors should look at Accenture (ACN) and Cadence Design Systems (CDNS).
Deglobalization is the retrenchment of global trade, barrier-free migration policies, and over-reaching influence of multinational corporations. Evidence of this factionalism is plain to see. European and U.S. policy makers are at war with big technology firms because they present an easy target for populists. Politicians across the globe are pushing back against immigration. And corporations are rethinking where they manufacture their products.
The Wall Street Journal reported this week that Apple Inc. (AAPL) is making plans to move production from China.
It would easy for investors to focus on the negatives. There is another way.
Reining in globalization will lead to new infrastructure in all of the major regions of the world. This process is now well underway in Japan, Korea, China, Europe, and North America. Duplicating the world’s infrastructure will mean new construction, manufacturing and technical jobs. The US Congress in September passed the CHIPS Act and FABS Act, legislation worth $52 billion in new spending for domestic chip fabrication. Similar policies are gearing up in the public and private sectors in Europe, China, Korea, and Japan. Capital is being deployed to ensure unobstructed, regional access to microchips.
Cadence Design Systems makes software used by the semiconductor industry to design microprocessors, and help with software integration. The business is extremely profitable from the ground up. Current gross margins are 90%. Operating margins are 28%. And since 2020, free cash flow is up 77%.
The San Jose, Calif.-based firm touches every part of the semiconductor sector, small and large. The company builds the software those businesses need to scale new processes, and to integrate with ever-evolving software applications.
Deglobalization means that there will be more of those firms, in more parts of the world. More importantly, they will need to gear up quickly. Chip designers need software from companies like Cadence to make the transition.
Accenture is a professional services company. Its consultants are dispersed all over the world, embedded at many of the biggest global brands. These workers are building real software. They are intimate with regional regulations and policy dynamics.
The Dublin, Ireland-based company currently has 721,00 employees and $50.5 billion in revenues, according to a company factsheet. More importantly, its business is a steady grower with solid margins. During the fiscal fourth quarter sales jumped to $13.4 billion, up 24% year-over-year. The operating margin was 14.6%, according to a filing at the Securities and Exchange Commission.
Granted, a lot of investors are worried.
They are concerned about shrinking corporate profits, rising prices for inputs, and component shortages. Many of these short-term issues peaked in the first half of 2022.
Oil prices have declined from $119 in March, to $77.50 today. During the same time frame, copper slid from $4.89 per pound to $3.87. The global container freight shipping cost peaked in September 2021 at $10,361. Today goods can be shipped for only $3,145, according data compiled at Statista.
Investor can look backward, or they can look into the future.
Cadence Design Systems and Accenture are well positioned to benefit from deglobalization. This trend is now well underway, and will not revert. Supplying a shrinking world caught up in factionalism, means increased regional infrastructure. It’s a gold rush for the companies that provide picks and shovels.
Get ready to buy or add these to your positions. The time is coming.
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