As the Russia ‘Earnings Squeeze’ Approaches, Here Are the Two Moves You Can Make Today
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As the Russia 'Earnings Squeeze' Approaches, Here Are the Two Moves You Can Make Today
Just two weeks after Russia invaded Ukraine, Moscow-based profiteers were advertising McDonald's Big Macs (normally $1) for $36, Egg McMuffin breakfasts for $18, Mickey D's "signature glasses" for $74, and a paper bag with the "Golden Arches" branding for a stunning $373.
Those hefty asking prices – coupled with images of Moscow residents rushing to grab McDonald's meals and "enjoy that last taste of a bygone era" – went viral.
And it made for a great story. But it was not the story.
The real story was that McDonald's Corp. (MCD) was responding to Moscow's militance by shuttering the 850 restaurants it has in Russia – a country that accounts for a hefty 4.5% of its revenue, according to data from Factset Research. Other companies with "material" revenue exposure to Russia include:
Cigarette-maker Philip Morris International Inc. (PM) at 8%.
Snacks-and-soda player PepsiCo Inc. (PEP) at 4.3%.
EPAM Systems (EPAM), a software developer that relies heavily on workers in Russia, Belarus, and Ukraine, at 4.1%.
Motorsports player Formula One Group (FWONA) at 4%.
And cookies and thirst-quencher Mondelez International Inc. (MDLZ) at 3.1%.
Welcome to the looming Russia "earnings squeeze" – whose risks and impact won't be easy to assess. Today, I'm going to help you with that. I'll tell you what to watch for and explain what matters — and what doesn't.
And I'll show you two moves to make right now – moves that will protect you today and set you up to make money in the months to come.
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It's hard to believe it's already been a month since Russian President Vladimir Putin sent his army into Ukraine in the biggest attack on a European state since World War II.
It's a still-growing horror that's killed up to 1,000 Ukrainians and prompted as many as 3.5 million people to seek asylum in nearby countries or flee overseas.
At a government level, condemnation has been all but unanimous (with China standing as a glaring exception). But at the corporate level, the response has ranged from "we're outta here" decisive to "impossible to decipher" ambiguous.
Just after the Ukrainian invasion, Yale's Chief Executive Leadership Institute (CELI) – known to many as the "CEO College" – created a list of companies that had announced plans either to remain in Russia or to leave altogether.
That roster, which CELI keeps updated, features 400 names as of this writing. And while it seems like a simple concept – you're either pulling out of Russia, or you're not – it's much more nuanced. So much so, in fact, that this list has morphed into five categories:
A Straight-Up Withdrawal: Making a clean break and exiting Russia.
A Suspension: Ceasing operations temporarily, but holding out the potential for return.
Scaling Back: Reducing some aspects of operation, but not ending it altogether.
Buying Time: Holding off on new investments or projects, but continuing "business as usual."
Digging In: Defying demands for exit.
With the rising death toll and the human rights nightmares on the evening news, you have to wonder why any company would choose to resist the sentiment that creating distance from Russia is the right thing to do.
As it happens, picking up stakes and leaving is like your relationship status on Facebook or that 2009 Meryl Streep film – "It's Complicated." There could be contractual obligations as well as huge capital outlays in factories, machinery, and inventory. And don't forget the people.
Koch Industries has been emphatic about its intent to stand pat. Referring to its two glass factories there and the 600 workers who could come to harm, Koch President Dave Robertson said, "We will not walk away from our employees there or hand over these manufacturing facilities to the Russian government."
Should I Stay or Should I Go?
But as I alluded to earlier, many other companies are walking away — meaning they'll be victims of that Russian "earnings squeeze."
Take BP plc (BP), which says it's divesting its 19.75% stake in the Russian energy giant Rosneft. It will likely do so at a huge loss just to be able to unload its holdings; the move could cost BP up to $25 billion. Ouch.
Shell plc (SHEL) is exiting a relationship with Gazprom, another Russian energy company – triggering a loss of $3 billion. It's also pulling out of a 745-mile Russia-to-Germany pipeline project.
Aerospace heavyweights Boeing (BA) and Airbus SE (EADSY) each pledged to suspend parts shipments and maintenance support to Russian airlines. Boeing and Airbus jets account for as much as two-thirds of the Russian fleet.
Make no mistake: That's going to leave a mark – today and in the future.
Automakers Ford (F), Honda (HMC), Volkswagen (VWAGY), and BMW have each announced plans to motor away from Russia.
Furniture player IKEA went even further. It not only closed all stores in Russia, but also severed ties with top Russian ally Belarus – making IKEA one of the first companies to do so.
Choosing the Right Path
With Russia's economy being so small (America's 2021 nominal GDP of $22.94 trillion was nearly 14 times bigger than Russia's $1.65 trillion), some folks might argue that abandoning Russia has only upside.
Pouncing on the Russian economy's trivial size, some pundits even use a bit of stomach-turning logic to justify such an exit, arguing that these companies will benefit from a "goodwill" PR boost by aligning themselves with the people of Ukraine.
After all, Ford only sold 22,000 cars and trucks throughout Russia last year, while General Motors (GM) sold a paltry 3,000. By contrast, in 2021 alone, each automaker sold more than two million vehicles in America.
Dell Technologies (DELL) joined such companies as Apple (AAPL), International Business Machines (IBM), and Canon (CAJ) in abandoning Russia and the "business-as-usual" approach there.
As it turns out, "doing the right thing" won't even be that costly.
Dell's own analysis found that the Russia-Ukraine conflict will result in a double-digit contraction of market demand in both countries. However, taken together, those two countries account for only about 5.5% of total European technology spending. And globally, Russia and Ukraine amount to about 1% of the market.
Those are the direct contributors to the Russia "earnings squeeze." But there are indirect contributors too, some of them significant.
To illustrate what I mean, let's look at a sector that's near and dear to my heart.
Lining Up the Zeroes and Ones…
I'm a tech guy at heart (a personal affinity that brought me to TradeSmith). So I'm particularly sensitive to the ongoing chip shortage – a key storyline in the still-broken global supply chain, and one that's impacting virtually every sector while further stoking the inflation fire.
Leaving a market like Russia — abandoning the sales potential as well as the assets that create them — will directly crimp a company's sales and earnings.
So will a broken supply chain.
If a company has to pay more for key ingredients, it'll boost its costs and squeeze margins. And if it can't get those ingredients at all, that'll blunt overall sales.
With either (or both) of those scenarios, the result is either slower profit growth or an outright decline. It's one more way some of the companies we're talking about end up as Russia "earnings squeeze" candidates.
Take the ongoing chip shortage – a component of the broken global supply chain and one that's putting the squeeze on almost every sector you can think of. Just as we thought we'd be seeing the light at the end of the tunnel on semiconductor shortages, it looks like the situation is about to get worse.
And, as fate would have it, two key ingredients in the chipmaking recipe come from Ukraine and Russia.
The highly purified neon gas that's used to etch circuit designs into silicon wafers to make chips comes from Ukraine; indeed, Ukraine is the world's leading exporter. It also accounts for 45% of the world's palladium supply, another key ingredient for semiconductors.
And as you can imagine, those Ukrainian suppliers have their hands full just staying alive. (And it's not just tech; it's also agriculture. Wait till you see what happens to your grocery bill when a region that produces 25% of the world's wheat has to focus on survival instead of farming.)
Back in 2014, after Russia first invaded Ukraine, the price of neon rocketed 600%. So we have a precedent to help us predict what's coming next.
That brings me to the first of the two moves you want to make now.
Russia 'Earnings Squeeze' Move No. 1: Dell
When leaders of Dell looked at whether they had to abandon Russia, I believe they were confronted with a "Hobson's Choice" – meaning they had no choice at all.
But don't let that move spook you away from a good potential opportunity.
TradeSmith algorithms spotlight Dell (DELL) as a healthy stock in the Green Zone. Though it has understandably wobbled since the first of the month, dipping briefly into the cautionary Yellow Zone on three occasions, it has been healthy overall since July 2020.
DELL is in a side-trend, and our Timing indicators suggest it's just coming out of a low-conviction peak area, so there is a chance we could see it dip further.
Prior to March, DELL enjoyed a strong bull run, gaining 123.17% since its Entry Signal triggered in July 2020. In fact, it's got a Bullish rating from Ratings by TradeSmith.
And Dell just announced a special dividend distribution of 33 cents per quarter. This ends an eight-year dry spell, since the company's last dividend payout came in October 2013.
This is a stock that may have flown under your radar, but the Bullish rating combined with our indicators and the steady growth it's displayed over the last two years make it a stock you'll want to take a careful look at.
That brings me to my second recommended move – one that gives you control in an uncertain market and one that I like even more than the first.
Russia 'Earnings Squeeze' Move No. 2: Make Stocks Dance to Your Tune
Russia's invasion of Ukraine and the resulting "earnings squeeze" just adds to the economic woes investors face: inflation, deglobalization, rising interest rates, a broken supply chain, growing military threats... The list goes on.
You can wait to see how things go, or you can take control.
At a special investing conference last week, TradeSmith's senior analyst Mike Burnick showed folks like you how to "program" stocks to declare cash dividends on any schedule you want.
Mike has developed a way to pull thousands of dollars in income out of the market like clockwork each and every week.
And that's the real move I'd urge you to make today. It'll put you in the driver's seat – and the winner's circle.
Dividends are only one of four ways you make money using Mike's system. It was designed to generate cash in any market – whether your stocks move up, down, or not at all.
Conclusion
U.S. companies – and their counterparts abroad – really have a lot to consider with the war in Ukraine. There are no easy answers.
Taking control in your personal corner is one move you can make.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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