A Commodities Perfect Storm. Bed Bath & Beyond Goes Meme Stock.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe. In a moment, we'll talk about a perfect storm for commodities including oil, nickel, and wheat. And we'll say a few words about baby investments and Bed Bath Beyond's massive one-day stock gain. Listening in is our audio producer Jackson. Hi, Jackson.

Hi, Jack.

We've got a lot to get to here, and these midweek episodes are supposed to be short. How am I going to keep this close to 10 minutes?

You could talk really fast.

I could, or I could talk normal and you could just chipmunk it by like playing parts of it at double speed. What do you think?

Let's see how it goes.

We begin with commodities. Last week we discussed oil and why U.S. shale drillers are reluctant to increase production due to economic factors. Despite the price spike from Russia's invasion of Ukraine. And we heard from Halima Croft at RBC who said prices could push higher, and they have. We talked about how the US had not yet banned imports of Russian oil but could, and it has. The national average price of gasoline in the US has shot well over $4 a gallon in recent days and hit a new record. Some drivers are already paying more than $5 a gallon.— in Sonoma, Napa, and Marin counties. Right now they're hovering around $5.60 per gallon. On one hand, the economy is technically much less dependent on oil than it was for our parents and grandparents. I can point to a chart of something called the energy intensity of U.S. gross domestic product, and I can show how it has fallen sharply since the 1970s. On the other hand, that won't be much comfort to a family that has to commute long distances by car for work. And it's not just oil. Russia is also a major wheat exporter, and wheat prices are nearing all-time highs. In futures trading, they just finished 6 consecutive limit-up sessions. In other words, prices rose so quickly each day that they reached the daily limit. Nickel trading was halted in London after a 250% rise in 2 days that appears to have been related to margin calls and a short squeeze. Nickel is used to make nickels, of course, although those are actually 75% copper and a negligible part of demand. Batteries for electric vehicles are a more important demand driver, but The most important one by far is stainless steel.

Now, look, you can keep steel from corroding without nickel—we've known that for more than a century, since just before World War I when British metallurgist Harry Brearley discovered that a 14% mix of chromium kept gun barrels from rusting—but if you want your stainless steel to be easier to shape and weld, and to be non-magnetic, you're gonna want some nickel mixed in there, say 8% or 11%.

Jackson, you're chipmunking me now, aren't you?

I think the high voice suits you.

Well, the point is that nickel is important and Russia is a key contributor of high-grade nickel, but there's not really a shortage because low-grade nickel is abundant and engineers have figured out new ways to refine and use it. So the great nickel spike of 2022 might not last, but all these price dislocations are making investors nervous. By the way, the S&P 500 index was recently down 12% year-to-date, which is a pretty common intra-year drawdown historically speaking. The NASDAQ has been hit harder. What investors fear is that rising prices will both force the Federal Reserve to aggressively raise interest rates and increase the chance of an economic recession. A strategist at Credit Suisse recently called this a commodity perfect storm and said it could weaken the dollar. Caterpillar, which is best known for construction and earth-moving machines but which also does a big business in mining machines, was recently upgraded to buy from hold at Jefferies because of its ability to profit from a prolonged commodity upcycle. Deutsche Bank points out that commodities around the start of 2021 were trading at exceptionally cheap levels. It says they still look cheap relative to other financial assets, but that in the short term they could make a big move in either direction because the course of events like wars is obviously difficult to predict. It also says that long-term returns for commodities have been terrible. They tend to have short periods of exceptional performance and long stretches where they struggle to keep up with inflation, while of course paying no dividends. Speaking of dividends, Goldman Sachs this week wrote that inflation will likely stay above 6% through the third quarter of this year, and that stocks with healthy dividend yields and plenty of payment growth have historically done well in that type of environment. It tracks an index of stocks with high expected dividend growth Its constituents include Verizon, ConAgra, AbbVie, Snap-on, Broadcom, and Simon Property Group. And that's enough for now on commodities. Time for a few words on babies and a massive move for a would-be meme stock, right after this quick break.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back, Jackson. We had a listener question on babies. We do.

It's from Kate, who had a baby during the pandemic, and his name is Oscar.

Is this going to be about diaper changes? Because I think it helps to watch NASCAR pit crews. It's all about practice and preparation. You have to focus on tool location and efficiency of motion. I mean, I'm not saying it's exactly the same. In NASCAR, pretty much everyone gets to wear a onesie, but you can—

It's more about investing.

Oh, that makes sense. Let's hear it.

Kate talks about the high costs of baby care, from eco-friendly diapers to designer bassinets. Even Oscar's getting overwhelmed.

This "I'm having a baby" industry is making gobs of money, and although we're totally in love with the new munchkin, I'm curious if there's a way that we can invest in some of these big box companies that hold some of the smaller names of products that are needed.

Thanks, Kate. There are not many baby-focused stocks. You know about the consumer goods giants like Procter Gamble and Kimberly-Clark that make diapers, but that's far from pure-play exposure. A company called Newell Brands owns Graco, the stroller maker, and NUK, a brand of bottles. But it too is a consumer brands generalist. It also owns Rubbermaid, Mr. Coffee, Paper Mate, Coleman, and Yankee Candle. There's a publicly traded company called Summer Infant with strollers and blankets and potties and more, but it's tiny with little coverage on Wall Street, and it grew only modestly last quarter. There's a pretty big chain called Carter's that sells clothing for babies and kids. Its stock has been a poor performer over the past 5 years. Another chain called Children's Place has been an even worse performer. There's a company called Natus Medical which makes devices for newborn care. It hasn't done great. There was a chain called Babies R Us that was owned by Toys R Us which went bankrupt. And that leaves Bye Bye Baby, which is part of Bed Bath Beyond, which has been a lousy long-term stock performer but which is having an eventful week. There's a Bed Bath Beyond surging today after Chewy co-founder Ryan Cohen, and it has to do with a man named Ryan Cohen. Now, Ryan Cohen, that stock jumped 34% on Monday after Ryan Cohen, a co-founder of pet supplies seller Chewy, announced he had bought a big position in shares. He's also the chairman of GameStop, and his investment there helped turn GameStop into a meme stock that set off an epic short squeeze and sent shares soaring. So maybe investors were thinking, here we go again. More than 105 million shares traded on Monday versus just a few million shares on the days just before. One theory on Bed Bath is that it could spin off its Buy Buy Baby chain and create more value for shareholders. The baby chain has decent growth and healthy profit margins, whereas Bed Bath as a chain has been losing market share, but investment bank Jefferies wrote that the price of past deals for baby goods companies suggests that Bed Bath would get a lower price for Buy Buy Baby than its stock price now implies. It has a hold rating on the stock. I know that doesn't give you a lot to go on for investment choices, Kate. One reason might be years of falling birth rates. And your happy news notwithstanding, there doesn't seem to have been a pandemic baby boom. The U.S. birth rate fell by an estimated 4% in 2020 to its lowest level ever. Let me switch gears for a moment on the subject of babies. I've always thought of the birth rate as an important, if early, economic indicator. Don't we need a growing population to fund future tax liabilities and create economic growth? But I talked a little while ago with someone who had a different perspective.

I mean, the richest countries in the world are the ones with the low population growth rates, and this has been true for the last 100 years. It's not actually true that we need population growth for economic growth.

That's Marina Adshade, a teacher and researcher at the Vancouver School of Economics. And as for babies funding future tax liabilities, she says That ship has already sailed.

A child that's born today isn't going to start contributing as a taxpayer for another 25 years at least. And over that whole period, you know, they're taking out of this system. It increases the number of people who are dependent on the existing taxpayers' dollars. By the time those people are contributing into the tax base, the boomer generation is in their 90s, right? And there's actually very few of them left. And the generation that follows is much smaller. You know, my generation, Generation X, is a tiny generation, you know, and as we start retiring, then that's much less of a concern. And so we can't solve our demographic problem by having more children.

Marina also says that part of the explanation for falling birth rates isn't really a gloomy or worrisome development at all. U.S. teenage births were unusually high among developed countries. And they've seen a steep drop. Meanwhile, births among women in their 30s and 40s have been rising. And Kate, that might help explain some of the price shock you're seeing. Women in their 30s and 40s obviously have more money than those in their 20s on average because they've had longer to work and save. If families are having fewer children, but they're also having children at a point in life when they have more money to spend, then you would expect to see a lot of boutique baby businesses and upscale brands that are privately owned, along with mass market brands that are sold by the likes of Walmart and Target and Amazon rather than baby pure plays. And that might be why you're not finding many baby buys for your portfolio. But the Barron Streetwise podcast has a high conviction outperform rating on Little Oscar. Thank you, Kate and Oscar, for sending in your question. And everyone, please keep the questions coming. Just tape on your phone, use the voice memo app, and send it to jack.hough@barons.com. Thank you for listening. Jackson Cantrella is our producer.

He'll chip monkey if you're not careful. Subscribe to the podcast, write a review, follow me on Twitter. That's @jackhough.

See you next week. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.