Boeing, Estée Lauder, and 5 Other Stocks for a Very Confusing Market

It’s been a wonky year for markets so far—but there may be several stocks to play it.

While the Federal Reserve has yet to give a clear signal it will pause interest rate hikes, many investors believe that rates will moderate in 2023 as the central bank works to fight inflation. As a result, stocks have rallied this year, with the S&P 500 up 9% andBig Tech companies generating stellar earnings results all in the face of bank worries and recession fears.

Several fund managers who attended the Morningstar Investment Conference are still looking for bargains—even though many economists such as Bank of America’s Michael Gapen see a case for a mild economic slowdown in 2023. The managers are focused on players in the aerospace industry, given the healthy outlook for travel, and companies with strong pricing power that can weather big swings in consumer demand.

Fidelity Investments portfolio manager Matt Fruhan during a panel on Wednesday said that he’s bullish on U.S. commercial aerospace firms such as Boeing (ticker: BA) and General Electric Company (GE). Passenger air traffic is growing and “we are still in the recovery phase of covid,” said Fruhan, who has been investing in the theme for the past 12 months to 18 months.

Demand for air travel in February—as measured by revenue and distances flown—rose 55.5% versus a year ago, according to the latest air traffic report from the International Air Transport Association, which represents some 300 airlines. That figure, however, is still lower than pre pandemic levels, matching about 85% of global traffic witnessed in February 2019.

Besides the U.S. names, Fruhan also likes French aerospace supplier Safran (SAF.France). It’s an engine manufacturer that also sells units like seats and lavatories and offers repair services, adding a recurring revenue stream.

Nate Velarde, co-portfolio manager of the Chautauqua International Growth Fund, bought Safran shares in 2022. He sees the proliferation of low-cost airlines as a tailwind—and is impressed by the company’s successive price increases in its spare parts business in 2021 and about 10% in November last year.

“Given the broad environment we are faced in, you need to find companies that have the ability to protect margins [through] pricing power,” Velarde told Barron’s at the conference.

Spencer Adair, a portfolio manager and partner at Baillie Gifford, says luxury cosmetic brand stocks are the best examples of pricing power, given makeup stands as “absolutely critical” in any macro environment.

One of his favourites: Estée Lauder (EL), which was a Barron’s pick last year. Shares are down 0.6% so far this year: Results for the December ended quarter showed prolonged Covid-19 lockdowns affected foot traffic at bricks-and-mortar stores in China. However, Adair expects these headwinds to abate, as China’s reopening gathers steam and Estée Lauder accelerates its direct to consumers sales.

Adair, who manages the nearly $300 billion investment firm, also likes Japanese skincare brand Shiseido (SSDOY), which reported a 6% drop in its China business last year. Adair cited demand from Chinese travellers, who are known for their interest in multi-step skincare regimens, as a tailwind.

Natasha Kuhlkin, a large-cap growth equity portfolio manager at Jennison Associates, sees strength in global luxury consumer brands. While sitting on a panel about the disruption of growth stocks with Adair and Fruhan, Kuhlkin named LVMH Moët Hennessey Louis Vuitton (LVMUY) and athleisure brand Lululemon Athletica (LULU). “There’s a controlled supply” of these companies, she said, adding that they “are starting to appeal to more consumers.”

Lululemon trades at 31.6 times forward earnings, lower than its 40.5 times five-year average. LVMH, meanwhile, is trading at 25.6 times nearly matching its average five-year price-to-earnings ratio.

Ultimately, it’s all about customer demand and how far can people stretch their frugality. Switching to a cheaper laundry detergent may work for some, but quitting on their go-to-gym leggings might be asking too much—giving companies with pricing power a leg up.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Boeing, Estée Lauder, and 5 Other Stocks for a Very Confusing Market

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.