Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Tariffs Change Your Stock Picking Strategy
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, I appreciate it. Honestly, if today was worth a coffee to you, that is the link — buy me a coffee dot com slash fexingo. Luna: Yeah, keeping this ad-free lets us actually dig into the messy stuff without rushing. Thanks for supporting the show. Lucas: Let’s get back to it. The headline from CNBC this morning about tariffs squeezing American companies is the kind of noise most stock pickers ignore until their quarterly report looks terrible. But right now, with the market hovering around seven thousand six hundred fifty, ignoring trade policy is a mistake. Luna: It feels like everyone is still pricing in the old world where global supply chains were frictionless. That ship has sailed, hasn't it? Lucas: Completely. The issue isn't just that tariffs exist; it's that they are sticky. When you look at fuel costs and interest rates rising simultaneously, you get this double-whammy effect on margins. Most analysts are looking at price to earnings ratios as if last year's cost structure still applies. It doesn't. Luna: So you're saying we need to stop looking at backward-looking earnings and start looking forward at input costs? Lucas: Exactly. Let's take Nucor. They are a domestic steel producer. On the surface, tariffs on imported steel seem like a gift to them because it raises the cost for their competitors. But if Nucor relies on imported scrap metal or specialized machinery parts that aren't made in the U.S., their own costs go up too. It's not a simple win. Luna: Right, so even the 'winners' of tariff policy can get squeezed if they aren't fully vertically integrated. How do we spot those vulnerabilities before the market does? Lucas: You look at the gross margin trend over the last three quarters, not just the net income. If a company's gross margin is compressing while revenue grows, they are losing pricing power. They might be selling more units, but they are making less money on each one because their input costs are rising faster than they can raise prices. Luna: That is a much clearer signal than just watching the stock price. So what does a company with real pricing power look like in this environment? Lucas: Think about a company like Microsoft. They sell software licenses. The cost of goods sold for an additional copy of Windows or Office is practically zero. When inflation hits, they don't need new factories or shipping containers. They can raise prices immediately, and their customers absorb it because the value proposition is already embedded in their workflow. Luna: Software feels safer, but it's expensive right now. Are there any industrial examples that hold up? Maybe something in the energy sector? Lucas: Look at ExxonMobil or Chevron. Energy is a commodity, but these companies have massive balance sheets and operational flexibility. If tariffs drive up oil prices, their revenues go up almost instantly. Their costs are relatively stable because drilling is a fixed process. You see them passing every dollar of increase straight to the bottom line. Luna: So the rule is: find businesses where costs are fixed or predictable, and revenues are floating. That way, when the tariff hammer drops, they capture the spread. Lucas: Precisely. Now, let's talk about the losers. These are usually the retailers and consumer discretionary brands that rely heavily on overseas manufacturing. If you are buying a stock because it sells cheap t-shirts or plastic toys, and those products come from a country facing a twenty-five percent tariff, your margin is gone unless you raise prices by twenty-five percent. Luna: And consumers won't accept a twenty-five percent price hike overnight. They will just stop buying. So volume drops, and margins collapse. Lucas: Exactly. We saw this with some apparel giants last year. They tried to pass costs along, sales tanked, and then they had to eat the cost anyway to clear inventory. It's a lose-lose scenario. The key is to avoid any company where more than thirty percent of their bill of materials comes from high-tariff jurisdictions. Luna: Thirty percent sounds like a good hard limit. Is there a specific metric we can check quickly in a financial report to see that exposure? Lucas: Check the segment reporting in the annual 10-K. Look for geographic revenue breakdowns, but more importantly, look for mentions of 'import duties' or 'foreign exchange headwinds' in the management discussion. If they are constantly complaining about currency swings and import taxes, run. Luna: Red flag number one. What about companies that are trying to move production back to the U.S.? Isn't that a positive long-term story? Lucas: It is a positive story, but it is a capital-intensive nightmare in the short term. Building a factory takes years. You have depreciation charges eating into your profits for five to ten years before you break even. Right now, in September of twenty twenty-six, we are in a high-interest-rate environment. Borrowing money to build that factory is expensive. It drags on returns on invested capital. Luna: So even if the strategic move is right, the financial metrics look bad for a long time. That makes it hard to justify holding the stock today. Lucas: Correct. Unless you are a patient investor willing to wait a decade, these stories are traps. You buy the dip, hoping for the pivot, but the pivot never arrives fast enough to save your portfolio. Stick to companies that are already profitable and insulated from these shifts. Luna: It really comes down to simplicity. Simple businesses, simple supply chains, and strong pricing power. Anything else is too complex for this climate. Lucas: I agree. Complexity is the enemy of alpha when macro variables are volatile. If you can't explain in two sentences why your stock survives a tariff war, you shouldn't own it. Keep your portfolio concentrated in boring, resilient compounders that don't need global logistics to survive. Luna: Boring pays bills. Complex risks them. I think we should all write that down. Lucas: Do it. And remember, the market is currently pricing in stability, but the underlying reality is shifting. Adjust your lens, and you'll see opportunities others miss.