The novel coronavirus pandemic triggered an economic collapse, which forced policymakers to pursue ultra-expansionary policy. These policies have helped in stabilizing the economy, but higher inflation fears have increased in the recent past. Changes in economic conditions, geo-political scenario shifts or higher inflation necessitates portfolio adjustment. Given the current outlook, there are certain stocks to buy now that can trend higher as inflation accelerates. This column will discuss stocks that can protect investors from inflation.
Coming back to the Federal Reserve, the central bank indicated last year that it’s willing to tolerate higher inflation. Recently, Federal Reserve Chair Jerome Powell opined that higher inflation might be temporary and the Fed will remain “patient.”
As the central bank maintains status-quo, commodity prices have hit the highest level since fiscal year 2013. Powell might be right that higher inflation is temporary. However, it makes sense to pursue some portfolio re-adjustment to ensure that your portfolio returns comfortably beat inflation. The goal is to preserve purchasing power.
Let’s look at seven stocks to buy now to protect from higher inflation:
- Newmont Corporation (NYSE:NEM)
- Freeport-McMoRan (NYSE:FCX)
- Chevron Corporation (NYSE:CVX)
- Hecla Mining (NYSE:HL)
- Riot Blockchain (NASDAQ:RIOT)
- Rio Tinto (NYSE:RIO)
- Adecoagro (NYSE:AGRO)
Stocks to Buy Now to Protect From Inflation: Newmont Corporation (NEM)
For decades, gold has been an effective hedge against inflation. Gold is one asset class that central banks prefer to hold other than fiat money. This is an indication of the important purpose gold serves as a “store of value.”
Besides exposure to physical gold and gold exchange-traded funds (ETFs), investors can consider buying quality gold-mining stocks. NEM stock is probably among the best. The stock has traded flat for the last few quarters. This is a good accumulation opportunity. Once inflation accelerates, gold is likely to cross $2,000 an ounce. NEM stock will trend higher, in addition to providing healthy dividends.
As of fiscal year 2020, Newmont Mining had 94Moz of gold reserves and 101Moz of gold resources. With more than 10 years of gold reserve life, the company is well-positioned to benefit from rising gold prices.
In the next few years, Newmont Mining also expects all-in sustaining costs to decline to $800 to $900 an ounce. Even if gold trades at $2,000 an ounce, it would imply robust EBITDA (earnings before interest, taxes, depreciation and amortization) margins and cash flows. For FY2020, the company reported $3.5 billion in free cash flows.
Given the assets, cash flow visibility and dividend growth potential, NEM stock is worth buying at current levels. Furthermore, Newmont Mining has a strong balance sheet to pursue opportunistic inorganic growth.
Doctor copper is a well-known indicator of the level of economic activity. Additionally, copper is a good inflation hedge. As a matter of fact, data indicates that copper has outperformed gold during rising consumer prices.
Given this observation, it’s not surprising that FCX stock has surged by 333% in the last year. With expansionary monetary policies (inflation trigger) coupled with hopes of renewed global growth, copper prices have surged. In-sync with higher copper prices, the stock has been surging. However, the rally is far from over. If inflation accelerates in the year, copper is set to trend higher.
It’s worth noting that a higher copper price is already reflecting in the company’s fundamentals. For FY2020, Freeport reported an adjusted EBITDA of $4.2 billion and operating cash flow (OCF) of $3 billion. In the current year, the company is expecting EBITDA and cash flow to double on a year-on-year basis. This will also translate into significant improvement in the company’s net debt position.
Another important growth trigger is growth in copper sales. Last year, the company’s copper sales were 3.2 billion lbs. It’s expected to increase to 3.8 billion lbs for the year and 4.3 billion lbs for the next year. Higher prices coupled with production growth puts Freeport-McMoRan in a sweet spot.
Overall, FCX stock is interesting even after the big rally. The company will also be considering resumption of dividends during the year. This is another potential trigger for stock re-rating.
Chevron Corporation (CVX)
Bloomberg Intelligence data from 1992-2016 shows that for every 1% change in U.S. consumer price inflation, energy price has surged by over 25%. Clearly, it makes sense to buy some energy stocks for the portfolio.
I would therefore not hesitate in adding CVX stock to the list of stocks to buy now. With Brent trading at $62 per barrel, CVX stock is already near all-time highs. In addition to potential for further upside, the stock has an attractive annual dividend of $5.16.
It’s worth noting that legendary investor Warren Buffett acquired a 2.5% stake in CVX stock in the second half of 2020. Of course, the stock has trended higher in the last six months. However, there seems to be more positive momentum.
From a financial perspective, Chevron is well-positioned to accelerate investments with a net debt ratio of 22.7%. This is likely to ensure that the company’s reserve replacement ratio remains higher even with robust production.
Another key reason to like Chevron Corporation is low break-even assets. As an example, the company’s Permian asset delivered positive cash flows even in FY2020. As oil trends higher, the company is well-positioned to report EBITDA margin expansion and cash-flow upside.
For the current year, the company is expecting capital expenditure of $14 billion. I believe that the investments are likely to be funded through internal cash flows. Last year, the company reported operating cash flow of $10.6 billion. With higher oil prices, Chevron is poised to deliver OCF in excess of $14 billion.
Overall, CVX stock looks good for further upside and is among the top stocks to buy now to protect from inflation.
Hecla Mining (HL)
The broad range of precious metals are attractive for exposure during times of inflation. I already talked about gold and Newmont Corporation. HL stock is another solid name among stocks to buy now to protect from inflation.
Hecla Mining is a leading producer of silver in the United States. In the last year, the stock has been an outperformer, having surged by 171%. If inflation accelerates and silver trends higher, HL stock is likely to see further upside.
In terms of assets, Hecla Mining has 188.4 million ounces of silver reserves as of FY2020. In addition, the company also has 2.4 million ounces of gold reserves. As precious metal prices trend higher coupled with production growth, the company’s free cash flow is likely to swell. For the last year, Hecla generated $180.8 million in operating cash flows and $89.8 million in free cash flow.
It’s also worth noting that for FY2020, the company reported an all-in sustaining cost of $11.89 for silver. Silver is currently trading near $25 levels. This implies robust EBITDA margin potential even if silver price remains flat. Even for gold, the company has guided for an attractive AISC of $1,200 to $1,300 an ounce for the year.
From a financial perspective, Hecla Mining reported a total cash buffer of $380 million as of FY2020. With a low net-debt-to-adjusted-EBITDA (leverage) of 1.8, the company has strong financial flexibility for organic and inorganic growth.
Riot Blockchain (RIOT)
Cryptocurrency is a relatively new asset class. However, it seems that Bitcoin (CCC:BTC-USD) will be a good hedge against rising inflation. There are no second thoughts on the point that inflation is also a monetary phenomenon. With continued expansionary policies, fiat currencies are likely to weaken on a relative basis.
On one hand, there is no limit to the amount of dollars that can be printed. On the other hand, Bitcoin has a limited supply with rising demand (due to wider adoption). This is likely to ensure that Bitcoin continues to trend higher.
As a Bitcoin miner, RIOT stock is well-positioned to benefit. Last year, the company mined 1,005 Bitcoins. However, with the continued acquisition of new miners, the number is likely to be significantly higher this year. Just for the first two months of FY2021, the company has mined 304 Bitcoins.
It’s worth noting that RIOT stock has surged by over 5,100% in the last 12 months. However, with mining capacity expansion likely to translate into revenue and cash-flow growth, the stock has remained resilient at higher levels. The stock is a good proxy to investing in Bitcoin, and fresh exposure can be considered at current levels.
Rio Tinto (RIO)
According to PIMCO, “commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with a hedge against inflation.” If we look at the Bloomberg Commodity Index, industrial metals constitute 19% of the index. Rio stock is a good way to consider exposure to industrial metals.
Given the inflationary trend, it’s not surprising that Rio stock has been moving higher. At a price-to-earnings (P/E) ratio of 12.35, the stock looks attractive. It’s also worth noting that the stock offers a healthy annual dividend of $4.64. If commodity prices sustain at higher levels, dividend growth is likely.
Looking at the financials, Rio Tinto reported operating cash flow of $15.9 billion and free cash flow of $9.4 billion in FY2020. Therefore, with higher commodity prices, the business is a cash-flow machine. I also like the fact that the company’s net debt was just $0.7 billion as of FY2020. There is ample financial flexibility for growth. Low leverage and high FCF is a key reason to expect dividend growth during the year.
Overall, Rio will continue to benefit from higher iron ore and aluminum prices. In particular, iron ore sales will remain the key cash-flow driver. Among stocks to buy now to protect from inflation, Rio stock is one of the top names.
Higher inflation benefits industrial and agricultural commodities. AGRO stock is attractive for exposure to agricultural commodities.
From a valuation perspective, AGRO stock trades at a market capitalization of $935 million. As of September 2020, the company’s farmland asset valuation was $763 million. Clearly, it seems that the stock is undervalued, even after a rally of 69% in six months.
Talking about the top-line growth triggers, ethanol, corn, coy and sugar prices are at a multi-year high. The company stands to benefit from this, and free cash flow is likely to accelerate during the year. It’s worth noting that for FY2020, the company reported adjusted EBITDA of $107.7 million, which was higher by 50.1% on a YoY basis. The positive impact of higher agricultural commodity prices is already evident on the financials.
Last year, the company also started exporting organic sugar, which is likely to command a premium pricing. The impact will be seen on margins in the coming years. Another important point is that in FY2017, the company initiated a five-year investment plan. The company is largely through the investment cycle. As capital expenditure declines, the company is well-positioned to significantly accelerate FCF.
Overall, AGRO stock looks attractive and can be included in the list of stocks to buy now to protect from inflation.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.