When I was working as an equity portfolio manager, I’d start at about 7am, work until about 2pm and then disappear for an hour or so to work out at a local gym. That cleared my head and worked off some of the stress of the job. This wasn’t real stress, like being a high wire acrobat, a firefighter or a brain surgeon. But I felt people did depend on me to help make sure they had enough money to send their kids to college and to be able to retire (btw, there are the two main investment goals for mutual fund/ETF investors).

I had/have a bunch of barbells at home, as well. The typical price for these weights, pre-pandemic, was about $1 a pound. During covid, though, that went up to as much as $4 (and, for all I know, they might have gone higher). I had become a thousandaire through my iron holdings alone!

The other day, painters noticed two 50 lb weights and two 40 lb-ers that I don’t use any more and asked if they could buy them. My phone told me that today’s price is back to just above $1/lb, and I (my wife, actually) sold them for about a third of that.

Suppose you’re a sporting goods store. A mad rush during early pandemic days cleans out your inventory of weights. You go to reorder and find:

–there’s a six-month wait,

–the minimum order quantity has tripled, and

–the price has gone from $.75/lb to $3.

What do you do?

You probably order at least some, so the shelves won’t look empty and customers won’t get into the habit of going elsewhere. You pay $.50/lb extra for accelerated delivery and offer the newly acquired weights at $4/lb, $.50/lb above your direct cost.

Now it’s today and the weights are still on the shelf. In a perfect world, you’d immediately write the weights down on the balance sheet to $1/lb and hope to sell them at no gain/loss just to clear them out.

But publicly-traded companies don’t live in a perfect world. And many, I think, have been facing the equivalent of the barbell issue I’ve sketched out, only on what I think is a surprisingly large scale. No CEO wants to announce a billion dollar+ inventory writeoff, which would be the most straightforward oslution to the issue. Not only would management look stupid, but there would go the yearly bonus …and maybe top management’s jobs, as well. Probably wouldn’t be great for the stock price either. The more pragmatic strategy would be to play down the mess and hope to whittle away at the problem, offsetting superior performance elsewhere in the company with sales of pandemic-era merchandise at a loss. Yes, the stock will tank as the market figures this out, but it won’t be so clear that top management is at fault.

The practical question for us as investors, assuming what I’ve outlined above is more or less accurate, is when the period of inventory adjustment will be over. My guess is that a large part of the work has already been done and that the final dumping will happen during the holiday selling season this month and next.

My guess is that it’s time to look around among beaten-up retailers.