The Sunday Edge · where the market sits, one stock spotlight, one principle.
Same drop, very different businesses.
n Wednesday the September inflation report came in hot. Consumer prices rose 0.6% in a single month and 3.7% over the past year, with energy costs leading the way. By the close, the S&P 500 had given up about 1.1%.
Two of the stocks our models hold finished that day almost exactly level with each other. ASML fell 3.94%. Goodyear fell 3.95%. On a price screen they looked like the same trade. As businesses facing higher costs, they have very little in common.
The four gauges above compare today's market with its own history back to 1950, and on their own they have never been a reliable signal to buy or sell.
Whatever the live numbers above show when this is opened, the models will make no trade because of an inflation report. Holdings change only in the published rebalance window, on a fixed calendar.
ASMLASML Holding N.V.
ASML is about as clear a case of pricing power as the stock market offers. The Dutch company is the only maker of extreme ultraviolet lithography machines, the equipment chipmakers need to print the smallest and most advanced circuits. A customer who wants to build leading edge chips has no second supplier to call.
That position changes what a cost increase means. When energy, parts or labor get more expensive, ASML can build the higher cost into the price of machines that already sell for well over a hundred million dollars each, and the customer still has to buy them to stay in the race. The pace of the business is set by how much chipmakers decide to spend on new factories.
So why did it fall almost 4% on Wednesday? Prices adjust within hours. Earnings adjust over quarters. A hot report changes how much investors are willing to pay for every company's future profits at once, and the market repriced ASML in a single afternoon. Whether rising costs ever reach its margins is a question that takes several earnings reports to answer.
The risk worth naming plainly: pricing power protects the margin on each machine. It does nothing for the number of machines sold. ASML depends on a short list of large chipmakers whose spending rises and falls with the chip cycle, and export rules already limit what it can ship to China. ASML is currently held in Core 20, Tepper Tactical and Apex Momentum, and none of the three owns it on a forecast for inflation.
“The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business.”
Warren Buffett
Goodyear sits on the other side of that line. Much of what it costs to make a tire is rubber, carbon black and other materials whose prices follow oil, and the person buying replacement tires at the counter compares prices. When costs climb, a tire maker can raise prices and risk losing the sale, or hold prices and absorb the hit in its own margin.
On Wednesday the market marked ASML and Goodyear down by the same amount within hours. Sorting out which company can pass its costs along takes months of earnings reports, and a single afternoon of trading has no way to do that work.
So a day when strong and weak businesses fall together says very little about either one. The real test of pricing power is the gross margin line, and it shows up on a quarterly schedule.
Goodyear is held in Tepper Tactical, and its risks are the ones described above: input costs tied to oil and steady pressure from cheaper rivals. Like every holding, it was chosen by rule and is reviewed on the published calendar.
One question sorts the holdings in any portfolio after a hot inflation print. If a company's costs rose ten percent next year, who would pay for it, the customer or the shareholder?
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