Politicians, analysts, pundits and academics have been arguing over whether the economy is experiencing inflation. They may disagree, but the market has spoken. Yes, there is inflation, and yes, there are signs of it everywhere. Interest rates are rising. The price of copper has doubled over the past year. Lumber prices have soared to all-time highs. The Commodity Research Bureau index is way up. But how will inflation affect penny stocks?
The recent inflation should come as no surprise. The stimulus the Federal Reserve and central banks have used to fight the Covid-19 pandemic is inflationary. When the Fed creates money out of thin air, there is more money in the economy, yet the same amount of goods. This leads to higher prices.
Inflation and higher interest rates are generally bad for companies. They mean higher operating costs and diminishing purchasing power for customers.
But certain companies may benefit from inflation. The stocks of these companies may outperform the rest of the market if inflation rates continue to move higher.
- IAMGOLD Corp (NYSE:IAG)
- Ring Energy (NYSEAMERICAN:REI)
- Peabody Energy (NYSE:BTU)
- McEwen Mining (NYSE:MUX)
- Harmony Gold (NYSE:HMY)
- Denison Mines Corp (NYSEAMERICAN:DNN)
- Uranium Energy Corp (NYSEAMERICAN:UEC)
Penny stocks: IAMGOLD Corp (IAG)
IAMGOLD Corporation develops and operates gold mining properties in North American, South America, and West Africa. The company was incorporated in 1990 and is based in Toronto, Canada.
Many analysts and pundits are predicting that the price of gold will rise. It usually does during periods of inflation. Because of this, many investors consider it to be a safe haven or a good way to hedge their portfolios during inflationary periods. Penny stocks like IAG offer investors a solid entry point into this practice.
If the price of gold does rise, it will benefit IAG. This is simply because the company holds a lot of gold. If the price goes higher, the company will become more valuable.
The analysts that follow IAG all like this company. The consensus rating is a buy. The average target price is around $4.30. As of the morning of April 15, 2021, IAG shares currently trade for $3.38.
Ring Energy (REI)
Ring Energy is an exploration and production company. It explores, develops, and produces oil and natural gas in Texas and New Mexico. It was formerly known as Transglobal Mining Corp. The company changed its name to Ring Energy in March 2008. It was incorporated in 2004. The headquarters are in Midland, Texas.
As the price of oil and natural gas moves higher, the assets of Ring Energy become more valuable.
On the above chart, you can see how in November shares of REI were trading around 50 cents. Then they got targeted by the day traders and Reddit crowd. By March they were trading above $3 a share. They have given back some of their gains but are still significantly higher than they were a few months ago. If inflation persists there is a good chance they continue to rally.
At least four analysts follow this company. Their average price target is $3.16, and shares currently trade for $2.21.
Peabody Energy (BTU)
Peabody Energy Corporation is in the coal mining business. It operates in the United States, Japan, Taiwan, Australia, China, India, Vietnam, and South Korea. It was founded in 1883 and is headquartered in St. Louis, Missouri.
Despite the current rhetoric about the Green New Deal and alternative energy, there is still room for coal producers. Currently, about 20% of the energy used in the United States comes from coal. And as the economy expands as it comes out of the Covid-19 pandemic, the demand for coal and other sources of energy will increase. This increased demand should result in higher prices and higher coal prices will be a benefit to this company.
Three years ago, shares of BTU were trading around $46 a share. That’s more than 12 times higher than the current price. Of course, there is no guarantee they will ever get back to that level, but there is still a considerable chance that shares will trade higher than they are now.
McEwen Mining (MUX)
McEwen Mining is in the gold and silver business. It operates in the United States, Canada, Mexico, and Argentina. The company was founded in 1979. The headquarters are in Toronto, Canada.
In addition to gold, some analysts believe that silver is a better hedge against inflation than gold is. This is because gold’s value is largely symbolic. Silver, on the other hand, has many industrial uses. So if the economy heats up and this causes inflation to rise, there are two reasons to invest in silver.
First, the value will increase as investors seek a way to hedge against inflation. Second, there will be increased demand for silver as the production of products that use silver increases.
MUX stock currently trades for $1.18. Out of four analysts, everyone ranks the stock a buy, with a consensus price target of $1.78.
Harmony Gold (HMY)
Harmony Gold Mining mines and processes gold. It operates in South Africa and Papua New Guinea. The company also extracts and develops uranium, silver and copper mines. It was formed in 1950 and the headquarters are in Randfontein, South Africa.
This company has exposure to and will benefit from an increase in the prices of gold and silver. It also has exposure to copper.
Many analysts follow copper prices. Copper has a wide range of industrial uses. It’s a key component in home building, automobile production, electronics and many other products. Because of this, the price of copper tends to reflect the conditions of the broader economy. If prices are going up, it could mean that the economy is expanding. That’s interesting to think about in regards to penny stocks.
During the Covid-19 crash last March, the price of copper fell to around $2 a pound. Since then prices have doubled. If Harmony’s copper holdings increase in value, it could result in the company becoming more profitable.
Denison Mines Corp (DNN)
Denison Mines is a uranium exploration and development company. It was formerly known as International Uranium Corporation but it changed its name to Denison Mines in December 2006. The company operates in Canada and its headquarters are in Toronto.
As you can see on the above chart, shares of Denison were targeted by the Reddit crowd and day traders. Between November and February, the share price soared from about 35 cents to $1.50 a share. Since then, it has given back some of its gains and is currently trading around the $1.07 level.
Many of the other stocks that the day traders took hold of have given back almost all of their gains. The price of Denison has held up better. This could perhaps be because of its exposure to Uranium.
The price of uranium has climbed over the past year. This price appreciation has made this company and other uranium penny stocks more valuable.
Uranium Energy Corp (UEC)
Uranium Energy mines and sells uranium and titanium. It operates in the United States, Canada, and Paraguay. The company was formerly known as Carlin Gold, but it changed its name to Uranium Energy in January 2005. The original company was incorporated in 2003. The headquarters are in Corpus Christi, Texas.
As the price of uranium moves higher, this company becomes more valuable.
As you can see on the above chart, since November the price of UEC stock has more than tripled. If inflation persists, there is a good chance that the stock will keep going higher.
Investment bank H.C. Wainwright believes the stock is undervalued at current levels. They have it rated as a buy with a $5 target price. That is 73% higher than where shares are currently trading.
At the time of this publication, Mark Putrino did not have any positions (either directly or indirectly) in any of the aforementioned securities.