As global supply chains continue to recover from the disruption of the coronavirus pandemic, not all companies are equally equipped to deal with the rising cost of logistics. 
With freight costs rising nearly 10-fold over the past year, the effect rising costs is having on company profits may be an unpleasant surprise to investors in the coming quarters.
Trevor Gurwich, a portfolio manager at American Century Investments, likens the current situation to surge pricing used by taxi firm Uber.
“At rush hour, you get surge pricing. Your £20 cab ride suddenly becomes £40 because a lot of people want the car at the same time, and there's not enough cars,” he explained.
“That I think - is exactly what has happened in this economy. It is a very efficient reallocation of resources to the person that is willing to pay for it the most.”
He said that investors must therefore be very careful about stock selection in an environment where the global logistical system is still clogged.
“Many of these companies are struggling with production, they are then having to pay significantly more for freight, the freight is delayed, and it is getting to the customer late, and it's only getting to the customer probably 65% of what it should be getting to the customer,” he said.
“So companies are going to shortfall on revenues, and they're also going to increase costs, which ultimately means their profits are going to come down. You therefore probably don't want to be heavily weighted in some of these names when this is happening.”
This is exactly the type of environment where resilient quality growth companies really shine, according to Christopher Rossbach, manager of the J. Stern & Co. World Stars Global Equity fund.
He pointed to luxury goods company LVMH as one example of such a company that can thrive in this challenging global logistical environment.
Share price of LMVH over 1yr
Source: Google Finance
“We've seen very strong increases in revenues,” Rossbach said. The demand for luxury goods is there. It is inexorable. So it's a supply question.
“LVMH because of its scale, has been able to keep the supply growing. A large company like LVMH has big distribution setups where they operate. That allows them to get stuff to people. They also have the global footprint, and the ability to manage inventory.”
Whilst the company has of course faced challenges, Rossbach argued that because of LVMH’s scale, it has been able to operate in a way that is more resilient than smaller companies that are hit harder by logistics issues.
He said LVMH can comfortably pass on input price increases, and due to its scale, it also has the operating leverage to offset some of the cost increases.
Rossbach highlighted how LVMH’s margins have in some cases increased over the past year, despite the logistical challenges.
In its latest earnings report, the company revealed that it managed to achieve an overall operating margin of 26.6%, almost triple the 9.1% margin in the previous year. Its fashion and leather goods division achieved a margin of almost 41%.
“A 41% margin, of which labour is next to nothing. Yes, shipping and logistics will have an impact, but if you have those kinds of margins, it sort of doesn't matter,” he said.
Many other quality growth companies that he follows have been able to pass on rising costs of business, he said.
He highlighted how the chief executive officer of Eaton – an industrial power management company – told investors that he had never seen an environment as conducive to passing on prices increases as the recent environment has been.
“What we’ve seen in the second quarter is the incredible resilience of these companies,” Rossbach added. “What we've seen in most of the companies that we invest in, is that they've been able to maintain their margins.”
Gurwich, who manages the American Century Global Small Cap Equity fund, said the difficult environment has also created some great opportunities in the small-cap space.
These are companies benefiting from renewed demand because of the opening up of the economy – but without being clogged by logistical challenges.
One example of this type of company is RadNet, an American radiology firm that operates outpatient imaging services such as MRI scans and x-rays.
During the pandemic, the company saw its patient inflow significantly decrease. However, because the business has its centres and equipment already set up and running and it can be operated domestically through local doctors and nurses, meaning it doesn’t have to deal with any logistical challenges.
Share price of RadNet over 1yr
Source: Google Finance
“That's an example of a business that in this type of situation is really improving, because it's gotten to a point where people have to restart resuming their normal,” Gurwich said.
“If you're concerned about cancer, you come in for your screening,” he added. “You're not necessarily going to delete that screen because you need to find out what's happening. That’s kind of why it's really a more inelastic type of good. You need to have done. This is the type of name that is setting up well for this year.”