3 Tech Stocks That Will Profit From the “Commodity Shock”

In the past few months, commodities prices have surged. The Reuters-Jefferies CRB Index, which tracks 19 heavily-traded commodities, posted an +8.5% gain in September and then a +4.8% increase in October.

There are many drivers for this trend which are likely to continue. The falling dollar provides a boost, since global commodities are denominated in the currency and increase in price as the dollar falls. At the same time, countries like China and India have insatiable demand for commodities to fuel their growth . Add to those long-term factors the fact that there have been a variety of supply disruptions, such as bad weather and lower yields on mining operations across the world, and it’s no wonder prices are surging.

No doubt, the commodities boom has been great for investors. [Read my article on ways to play October’s best-performing commodities.] But the surging prices have been a big problem for companies that rely on commodities inputs. These include manufacturers, apparel makers, food producers and so on. Ultimately, they will experience a squeeze on margins, which could put pressure on stock prices. In fact, there’s a name for this trend: “the commodity shock.”

To deal with this, it’s likely companies will try to use technologies to improve their cost structures and streamline operations. This could be with supply-chain management, better sourcing and enhanced pricing strategies. And companies that can provide these services will profit handsomely.

So what are some of these types of companies that may benefit?

Let’s take a look at three:

1. PROS Holdings (NYSE: PRO) — This company develops enterprise software that allows large companies to optimize their pricing. This involves processing huge amounts of data in real-time and then applying complex formulas. The upshot is that the PROS technology can help companies not only with setting the best prices but also when to give discounts, increase shipping charges or provide promotions.

Even a small increase in prices — if done correctly — can have a major impact on a company’s profits. This is especially important in the current economic environment, where it can be difficult to pass-on price increases to consumers.

While 2009 was a difficult year for PROS, the fundamentals have been much better this year. The company has taken strides to make its software easier to implement, which is a key for getting new customers.

Despite all this, PROS still is showing declining revenue (according to its latest quarterly report) and is unprofitable. Because of large expense of its software, it will likely take some time to get more traction.

2. Ariba (Nasdaq: ARBA) — This company develops software for spend management. This includes help with sourcing (the network is over 180,000 suppliers), spend analysis, electronic invoicing, supplier monitoring and contract management. Ariba has more than 1,000 customers, which include half the Fortune 500.

But Ariba is not only about software. The company also has a team of domain experts who consult with customers to devise cost-effective strategies.

As for the financials, Ariba is growing at a nice rate. The company posted revenue of $95.1 million in the most recent quarter, up from $84.3 million in the same period a year ago. Cash flow from operations was $12.8 million.

3. Echo Global Logistics (Nasdaq: ECHO) — The company has a software platform that helps companies supply-chain costs, with a focus on freight. Echo’s system has a network of over 24,000 transportation providers and uses complex data analysis to find the most efficient option for its customers. The software also features automation of carrier management, routing compliance, freight bill audit and performance reporting. The result is that customers can realize cost savings of anywhere from 5% to 15%. Some companies have even eliminated their internal logistics departments, thanks to the software.

All in all, Echo has been growing at a sizzling rate. The company has been aggressive with recruiting sales people and has continued to innovate its technology offering. In the latest quarter, revenue rose to $113.5 million, up +61.8% from a year ago.

Action to Take –> All three companies stand to benefit from the commodity shock, however, Ariba and PROS shares have already had nice gains in the past few months.

But as for Echo, the stock price dropped -18% when its latest quarterly report was released. The problem was that the company was seeing some softening of customer demand, yet the fact remains that growth should still be fairly strong. And with the stock trading at less than 0.8 times revenue, the current valuation looks attractive. The stock could see a +20% to +25% return within the next six months.

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter’s picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.