Introduction to Trading in Supply Chains companies
Apple is the biggest public company in the world by market capitalization. In the third quarter of 2018, the company had a market capitalization of more than $1 trillion.
To put this into perspective, if it was a country, the company would be ranked at number 17. This is higher than Netherlands and Turkey and lower than Indonesia. Its GDP would be slightly lower than the GDP of Africa, which has a GDP of more than $1.5 trillion.
But in November, Apple’s stock had a tough week. This is because of the company’s suppliers who reduced their guidance for the year.
It started with a company known as Lumentum, which supplies Apple with facial recognition technologies. It was then followed by a company known as Qorvo, which supplies Apple with networking products.
A reduction of guidance by Apple’s suppliers was a good indication that the company’s latest devices uptake was not as expected.
Traders usually pay close attention to the revenues and guidance of the companies that supply Apple with products. If their revenues and guidance rise, it is usually an indication that Apple will do well. This is because to most of these companies, Apple is their biggest customer.
→ Six Fundamental Informations to Look at When invest in Stocks Companies
Why Supply Chains are important for traders
As a stocks trader, it is very important for you to understand the supply chains for companies that you invest in. This is because by understanding how they are performing, you can easily predict how the companies you are following are doing.
For example, General Electric is one of the biggest suppliers of engines to Boeing. Therefore, if General Electric’s aviation business announces a slowdown in business, it means that Boeing has some problems as well.
Similarly, if companies like Intel and NVIDIA announce slow sales, hardware companies like Dell, Apple, and HP will be expected to go down.
Therefore, the role of supply chain in making investment decision is very important. This is because it has the ability of influencing the stock performance of other companies. A boost in sales in one supplier could mean more orders while a reduced supply could affect other companies.
How to trade Supply Chains
To trade using this model, you need to understand a few things.
First, you need to understand the companies that supply the company that you invest in.
You can gain this information by going through the annual reports of the companies. You can also get this information from the business-related news websites like Bloomberg and Wall Street Journal. If you can afford paying a software provider like Bloomberg Terminal, you can get access to this information.
The supply chain is not only about companies. It is also about the raw materials and currencies. For example, when the price of crude oil jumps, chances are that the stocks of oil exploring companies like ExxonMobil and Chevron will rise as well. Similarly, when the price of gold rises, that of gold mining companies will rise too.
On the other hand, when prices of raw materials rise, the result is that the margins of the companies will be squeezed.
For example, if the price of cotton rises, it will squeeze the margins of companies like Adidas leading to their stock price to decline. Therefore, as a trader, you should always pay a closer attention to these issues.