The New Year is usually a good time to try to refresh a portfolio and buy stocks worth holding for the long run. I think MSC Industrial (MSM), Freeport-McMoRan (FCX), and On Semiconductor (ON) are three names worth looking at closely. They are all companies with excellent megatrends behind them and look set for long-term growth.
MSC Industrial for the U.S. industrial renaissance
Significant events often change how companies think about running their businesses. In this case, the COVID-19 pandemic and the accompanying lockdowns created massive pressure on supply chains. These issues, most visibly seen in semiconductor shortages that affected myriad companies’ ability to deliver products and sent costs soaring, have caused many companies to reassess their supply chains and procurement strategies.
As such, companies are looking to reduce supply chain complexity, often reducing their number of suppliers and looking to reshore production to the United States. It’s no accident that U.S. manufacturing spending has boomed in recent years.
According to the Department of the Treasury, this spending is primarily “driven by construction for computer, electronic, and electrical manufacturing” and supported by broader spending.
This is music to the ears of industrial suppliers like MSC Industrial, whose sales are its customers’ metalworking and maintenance, repair, and operations (MRO) needs. While the company is currently going through a period of softness in its end markets and is susceptible to some bad news flow, it’s nothing that lower interest rates won’t alleviate later in the year.
Moreover, if the renaissance in U.S. manufacturing and reshoring continues, then MSC Industrial will be one of the long-term winners.
Freeport-McMoRan for copper’s role in the energy transition
The world is moving away from the internal combustion engine (ICE) and toward electric vehicles (EVs). It’s also moving away from reliance on fossil fuels for energy generation toward renewable energy. Both trends are positive for copper demand, as EVs require much more copper, mainly in its wiring, than ICE vehicles do.
Meanwhile, investment in wind, solar energy, and storage solutions imply significant investment in copper, including investments in the transmission and distribution networks necessary to connect renewable energy to the grid. In addition, the ongoing electrification-of-everything trend — think data centers, industrial automation, and smart buildings, infrastructure, and cities — is also driving demand.
That all speaks to a solid underlying demand for copper, and Freeport-McMoRan, with its substantive copper mining operations in Indonesia and the U.S., stands well placed to benefit. The demand side of the equation is positive for Freeport-McMoRan, and the supply side is, too.
At the same time copper is needed for the energy transition, increasing environmental legislation makes obtaining mining permits harder. Not only does that restrict supply growth, helping support prices, but it also puts a premium on miners such as Freeport-McMoRan, who have brownfield expansion opportunities in Indonesia, Chile, and Arizona, as well as an initiative to extract copper from existing stockpiles using advanced recovery techniques. It all makes Freeport-McMoRan an ideal way to play the energy transition.
On Semiconductor for its secular growth markets
In common with MSC Industrial, On Semiconductor is experiencing some cyclical weakness in its end markets, but that doesn’t mean its long-term growth strategy isn’t right. Semiconductor companies are known for their exposure to cyclical end markets such as consumer electronics and information technology. When these types of customers see a slowdown in their sales, the first thing they do is cut semiconductor orders.
As such, semiconductor companies are usually treated as cyclical companies with volatile earnings and extra near-term risk. On Semiconductor is trying to reduce that cyclicality by exiting non-core markets and focusing on the secular megatrends in its two core end markets, namely industrials and automotive.
Management believes that growth technologies such as industrial automation, EV charging, renewable-energy infrastructure, advanced driver-assistance systems, and 5G networks provide On Semiconductor with an opportunity to increase their content significantly.
The near-term problem is that one undisclosed customer is holding back investment in response to weakening automotive sales. While that’s disappointing to hear, it doesn’t change the long-term investment thesis or the need for the automotive industry to invest in EVs hungry for the kind of intelligent power and sensing solutions On Semiconductor provides.
Moreover, the company’s forward price-to-earnings ratio of 17.4, based on analyst estimates, arguably already reflects the bad news from a customer. Lower interest rates in 2024 will help, and On Semiconductor’s secular growth markets look very well placed, making the stock attractive for growth investors.
— Lee Samaha
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Source: The Motley Fool