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For those expecting down-trending inflation data, you might have to sit tight a while longer. With a hot September inflation report dashing peoples’ hopes of easing product prices, it’s looking like this wish has been dashed for the time being.

The Consumer Price Index (CPI), a measure of what consumers pay for goods and services, rose 0.4% — double what economists expected. It rose 0.1% in August.

  • Compared to a year ago, prices are up 8.2%. In August, that figure was 8.3%.
  • Core inflation, which strips out food and energy costs, rose 0.6% in September, as it did in August. This measure is up 6.6% from a year ago, the highest since 1982 (if you do simple math, that is 40 years!). It was 6.3% in August.

Costs to producers (PPI) continue to be negatively affected, with some experiencing surprising month-over-month increases: energy at 0.7%; food as a whole at 1.2% with frozen potato, pork and seafood at 10%, 5.5% and 2.5%, respectively! (Src. CNN) So get ready for yet another round of higher energy and grocery bills as those costs will be transferred to you. On the positive side, if you’ve been looking for an excuse to go on a diet or take in your last big “cheat day” meal, now might be the time.

Lagging Indicator

Now, you might be scratching your head wondering why the heck inflation is still not being tamed, given the Federal Reserve’s outsized response to the higher inflation. It aggressively raised its benchmark target multiple times in 2022, and the rate of the 2 year T-Bill has increased from 0.78% in January 2022 to 4.48%, today.

The last time we addressed the subject of inflation and supply chain disruptions, we visited some industries/stocks to look at in tougher economic times (food aid, government subsidies, delinquent loans, remote monitoring, customer experience).  While the concepts in this article remain true, we also have to consider the coming relief that industries might experience as things potentially cool off, and that monthly inflation readings tend to be lagging indicators on the future direction of inflation.

Get Ahead Of The Fed With Research

Knowing that some of the inflation indicators that investors fixate on are lagging indicators, we want to beat the market to the punch.

Accordingly, we have to be prepared by continuing to look for Tier One Quality microcap companies or maybe even ugly companies that might turn into quality selections, and in particular dissect Q3 press releases, earnings conference call transcripts and SEC filings that might unveil clues of softening inflation that could lead to the Federal easing interest rate hike goals. Who knows, moves by the Fed might happen sooner than later, surprising the market.

We’ll be monitoring supply chain commentary as well as commodity price action, mainly in the food area and other hot pockets in the inflation number cited above.

This brings us to a company that on Friday morning reported its Q3 2022 financial results. It’s a stock we’re watching closely because it meets a lot of our tier 1 criteria,

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This brings us to Armanino Foods of Distinction Inc (OTC:AMNF), a company that on Friday morning reported its Q3 2022 financial results. It’s a stock we’re watching closely because it meets a lot of our tier 1 criteria,

Armanino is engaged in the production and marketing of upscale food products, including primarily frozen pesto sauces, frozen pasta products, cooked and frozen meat, and poultry products. Its products are marketed through a network of food brokers and sold to retail, foodservice, club-type stores, and industrial accounts.

The financial results for the quarter stated:

  • Net sales for the third quarter of 2022 were $15,400,353 compared to $11,857,707 for the same period last year, an increase of 30%.
  • Income before taxes for Q3 2022 was $2,055,215 compared to $2,006,080 for the same quarter in 2021, an increase of 2%.
  • Net income for this period was $1,553,742 (or $0.0485 per share), compared to $1,498,542 (or $0.0467 per share) for the same quarter a year ago, an increase of 4%.

Net income growth was flat because of the inflationary pressure of commodity prices on the company’s gross margins. While the company deals in food, supporting an assumption that it will continue to be negatively affected, we couldn’t ignore the management commentary indicating that just in the past few weeks, they’re already starting to see an easing of this pressure on the cost of its goods, as Tim Anderson, President and CEO of Armanino Foods, commented:

“Those challenges and headwinds consisted primarily of elevated cost of goods sold (COGS) caused by higher commodity costs throughout 2022. It appears, though, that some of those costs have started to normalize over the past few weeks. The impact of these sustained inflationary pressures have been mitigated by the reduction of our controllable costs as a percentage of net sales on a year-to-date basis.”

He added that it was the company’s:

“second highest quarterly sales on record, with profits greater than the same period last year despite macroeconomic challenges and industry headwinds.”

AMNF’s improving sentiment on inflationary pressures could be congruent with the lagging nature of what’s happening with the CPI and PPI numbers that are being spit out every month, versus what is going on in the real world.

In another instance that alludes to our theme, early last Friday morning, Greystone Logistics (OTC:GLGI), a plastic pallet manufacturer that we have been covering since 2012, reported strong Q1 2023 (Calendar Q3) financials, only via an SEC filing:

  • Sales of $18.8 million in Q1 2023 vs $14.7 million in the prior year period.
  • Non-GAAP EPS of $0.04 vs. $0.00 in the prior year period.

Management’s statement on the predicted decrease in raw materials caught  our attention:

“Cost of sales in fiscal year 2023 was $16,490,453, or 87% of sales, compared to $13,312,305, or 90% of sales, in fiscal year 2022. The decrease in cost of sales to sales in fiscal year 2023 was primarily the result of improvements in productivity. Management anticipates further improvements in the ratio of cost of sales to sales as the cost of raw materials are expected to show declines in the remainder of fiscal year 2023.”

We look forward to monitoring third quarter statements of more management teams to see how many might provide us with data we can crunch.

By the way, even though we’re  hoping for optimism on the inflation front, I’d be remiss not to end this week’s message to you without relaying a message about Harris Kupperman’s (@hkuppy, Founder and CIO of Praetorian Capital and @KEDM_com) prediction that oil prices will rise to $500 per barrel.

Then we will all be running for the hills!

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