Reflecting on what we said in our Investment Comments a year ago, we noted in April 2011 that inflation was starting to demonstrate a risk to the economy. The producer price index (PPI) had printed a 5.8% year-over-year increase. Consumer prices, as measured by the CPI, still looked relatively steady. However, the PPI increase was heavily weighted toward input goods, as distinct from finished goods, suggesting that price increases were marshalling “upstream” in the supply chain. They would likely flow downstream to the retail checkout aisle in due time. We warned investors that lower profit margins would provide some of the supply chain’s necessary relief.
The global economy would go on to lose some of its budding momentum later in the year, which would take some pressure off of prices. With the benefit of hindsight, we can now see that the inflation statistics we were seeing in early 2011 represented a local peak. According to the Bureau of Labor Statistics, prices for intermediate goods peaked in the spring then began to pull back. Inflation rates for finished goods increased until mid-summer, before easing in the second half of the year as well. Consumer prices have marched upward at a steady and (so far) controlled pace. Recent months have shown some tendency toward disinflation, but the CPI can be volatile on a month-to-month basis. With unusually mild winter weather permitting people to work and shop, and with gas prices rising again, we could be due for some higher consumer inflation numbers in the near future.
Directing our attention back to the April 2011 issue of IAS, in the midst of uncertainty around price levels, interest rates, Europe, and sudden disaster in Japan, we identified some new opportunities on the value-end of our spectrum. One of the stocks with highlighted was SYNNEX (Ticker: SNX), trading at $34.33. The electronics distributer sported a solid balance sheet and traded at less than ten times estimated 2011 EPS. We normally don’t focus on “deep value” plays, but SYNNEX demonstrated a talent for nudging margins higher year-after-year in a notoriously low-margin industry, and thereby turning upper-mediocre revenue growth into consistent double-digit EPS growth. We stated in our write-up, “fuel costs and potential wage inflation present near-term headwinds, but nothing on the horizon appears likely to knock this stubborn little growth engine off track.”
Since we wrote those words, the results have been good, with SNX shares up 21% to $41.49 as of this writing. The S&P 500’s total gains have tallied in the mid-single digits during the same period. However, the ride up has been a little rocky for SNX. The company’s first financial report as an IAS stock sent shares down 8% to the low $30’s. The earthquake and tsunami were hampering turnaround efforts at the company’s Japanese subsidiary. We called the flutter in the stock price a “buying opportunity.” The next quarter was more of the same, however, and the stock price remained depressed. Q3 seemed likely to improve, however, and further out we believed the company was gearing up for what we called a “very strong Q4.” Meanwhile, the low price earned SNX a consistent spot near the top of our P/E sort. All else equal, lower P/E’s are generally to be preferred, but all else can never be equal in the stock market. Being amongst the cheapest stocks on any list typically indicates potentially dangerous territory. The broader market declined throughout July, August, and September, and SNX traded down into the mid $20’s. From the time of selection through mid-September, shares were down about 33%—a pretty poor start.
Then Q3 financial results came in above analyst expectations. Management’s guidance also called for continued double-digit revenue growth. A switch had been flipped. Shares traded up 10% to $27 and, after one quick hiccup, never looked back, marching steadily higher by 80% in less than six months. Q4 results are now in the books. For the full year 2011, SYNNEX earned $4.08, up 25% year-over-year. The stock is trading above our buy-up-to price of $35 but still looks very reasonable on a valuation basis. With shares no longer plowing upward, but rather trading roughly in tandem with the broader market, the easiest money appears to have been made, at least for now. In truth, given the ride investors have been on since we first highlighted SYNNEX, the easy money wasn’t necessarily all that easy. A win is a win, however. We’ve certainly been pleased with SNX so far. As long as shares continue to make all-time highs, the investor base will feel the same.
Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.