In this environment, I think it’s a good idea to choose several stocks, including one or two penny stocks, that can outperform in an elevated inflation environment.
Without question, inflation is starting to run hot. Last month, the personal consumption expenditures price index jumped 3.4% year-over-year, the largest increase in nearly 30 years.
Experts are divided on whether this stepped-up inflation will be transitory, as Fed Chairman Jerome Powell contends, or long-lasting.
Because of the well-documented, strange situation in the labor market and the equally unusual year-over-year comparison with periods in which a sizable portion of the U.S. economy was closed, I think Powell’s viewpoint has some merit.
On the other hand, there are good reasons to expect inflation to continue to remain at multi-decade highs for some time. First of all, the government is obviously spending a great deal of money and that trend looks poised to continue for awhile.
Second, once inflation expectations become elevated among a nation’s population, to some extent they become a cyclical, self-fulfilling prophecy.
That’s because, in such an environment, workers’ salary expectations rise, leading to price increases, which feed higher compensation demands, starting the cycle again. For better or worse, I think we’re too deep into the cycle already for it to stop anytime soon.
And finally, I agree with the argument that I’ve heard from a few on the Street: the government wants higher inflation in order to help it tackle its gigantic debt. As is widely known and starting to be frequently discussed, inflation helps debtors.
Less well-known, however, is that inflation results in real, meaningful boosts to the federal government’s tax revenue because, in a high-inflation environment, workers get higher salary increases, propelling more individuals into higher marginal tax brackets.
During periods of elevated inflation, two of the best sectors in which to invest are commodities and education.
The price increases of commodities tend to outpace inflation, while, in the past few decades, education prices, at least in the U.S., have easily surpassed inflation.
Here are four, high-quality penny stocks from those two sectors:
- Newpark Resources (NYSE:NR)
- Key Energy Services (OTC:KEGX)
- Boxlight Corporation (NASDAQ:BOXL)
- Capstone Mining (OTC:CSFFF)
Penny Stocks to Buy: Newpark Resources (NR)
The company provides various fluids and equipment to companies that seek oil and natural gas.
It also provides equipment to petrochemical, electrical transmission, construction, and renewable energy companies.
In addition to being a good way to play rising inflation because of its presence in the oil and gas sector, Newpark’s exposure to construction, electrical transmission, and renewable energy makes it a good way to play the infrastructure and pro- renewables bills currently making their way through Congress.
Since the last quarter of 2020, Newpark’s quarterly revenue has steadily increased, indicating that the company is benefiting from the rebound of oil and gas prices. Its operating income has risen since Q3 of 2020 and turned positive last quarter.
The trailing price-sales ratio of this up-and-coming penny stock is just 0.7.
Key Energy Services (KEGX)
The company has some characteristics in common with Newpark. Like Newpark, Key provides fluids to energy companies. Key, however, also helps energy companies complete and maintain wells.
Also like Newpark, Key has some exposure to another sector that should do well going forward. Key offers services for commercial fishers; with food prices climbing, that’s a good business to be in.
Key’s financial performance improved significantly in Q1, as its top line jumped nearly 11% versus Q4 and its rig hours surged 18% compared with the previous quarter. The top line of the company’s fishing and rental services unit jumped 22% quarter-over-quarter to $6.4 million.
“Given continued strength in commodity prices, we expect to see further increases in activity and in the pricing of our services in the second half of 2021 as our customers seek to maximize production from their existing base of producing oil wells,” said Key CEO Marshall Dodson in a statement.
The 12-month trailing price-sales ratio of KEGX is a truly tiny 0.14.
Penny Stocks to Buy: Boxlight Corporation (BOXL)
The company provides technology for K-12 schools. After U.S. school districts received a huge windfall from the latest coronavirus relief package, Boxlight is very well-positioned to generate large sales and bottom-line increases despite America’s accelerating inflation.
Indeed, in Q1, the company reported record quarterly revenue and orders of $33.4 million and $47.7 million, respectively.
Boxlight’s Q1 revenue jumped an incredible 484% year-over-year in Q1, while its orders surged an even more impressive 528% YOY.
Its EBITDA, excluding certain items, was $1.6 million, up from a $700,00 adjusted EBITDA loss during the same period a year earlier.
Moreover, the company ended Q1 with a backorder of $20.9 million, and for Q2, it expects its top line to come in at $39 million and its EBITDA, excluding certain items, to be “at least” $1 million.
“We continue to benefit from unprecedented market expansion, particularly in the education sector as schools return to in-class learning and are utilizing increased technology budgets, supported by substantial government funding programs,” Boxlight CEO Michael Pope reported.
Despite Boxlight’s impressive growth, its price-sales ratio is a very reasonable 1.66, making it one of the penny stocks you really should be following.
Capstone Mining Corp. (CSFFF)
The company produced 47.8 million pounds of copper in Q1.
According to CNBC, “The underinvestment in copper over the past decade is causing supply problem.”
What’s more, since copper is heavily used in electric vehicles and renewable electric initiatives, demand for the metal is expected to remain strong over the longer term.
Copper prices should also be boosted by the infrastructure bill, which has many initiatives related to electricity. Finally, spurred by higher inflation, dollar weakness should also boost dollar-denominated copper prices.
Not surprisingly given the high copper prices, Capstone’s Q1 operating cash flow came in at a record $95 million in Q1. Its net income, excluding certain items, was $64.4 million, translating to 16 cents per share.
“Capstone’s robust balance sheet position plus strong operating cash flow generation enable us to advance multiple high return projects,” reported CFO Raman Randhawa.
So Capstone looks poised to benefit from a strong, virtual cycle, in which its higher profits will enable it to launch more mines, further boosting its bottom line.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.