Inflation worries are weighing on investors. The U.S. 10-year Treasury yield reached 1.62%, and bond yields are rising. Last year, the benchmark note’s yield hovered at 0.7%. Analysts say fiscal stimulus measures introduced during Covid-19 and a post-pandemic spending spree could trigger higher inflation. Therefore, today we introduce seven stocks that could prove resilient in inflationary times.
Wall Street is paying increased attention to the Consumer Price Index that measures the official inflation level. In April, prices jumped 4.2% year-over-year (YoY), making it “the largest 12-month increase since a 4.9% increase for the period ending September 2008.” Investors now wonder if the Federal Reserve will soon raise interest rates.
Which sectors could offer an inflation hedge for equity portfolios? Commodities (including agricultural produce, energy, as well as precious and industrial metals). In the past year, most commodity prices posted double-digit growth. As a result, many firms in commodities industries recorded positive earnings and robust financial performances.
Real estate investment trusts (REITs) could also provide protection against inflation. Relative to fixed income and equities, hard assets are typically regarded as an inflation hedge.
Financial stocks can typically perform better, too. For most banks, a significant amount of revenue comes from interest they charge on loans. When inflation is accompanied by rising rates, their income usually rises.
Against that backdrop, here’re our seven stocks that could act as hedges against high inflation levels in the coming months:
- Adecoagro (NYSE:AGRO)
- Canadian Natural Resources (NYSE:CNQ)
- Citizens Financial Group (NYSE:CFG)
- Essex Property Trust (NYSE:ESS)
- iShares GSCI Commodity Dynamic Roll Strategy ETF (NASDAQ:COMT)
- West Fraser Timber (NYSE:WFG)
- Wheaton Precious Metals (NYSE:WPM)
Inflation Hedge: Adecoagro (AGRO)
Luxembourg-based Adecoagro is an agro-industrial company with assets spread across South America, primarily in Argentina, Brazil and Uruguay. The company operates three segments: farming; land transformation; and sugar, ethanol and energy.
It is an important producer sugar and ethanol producer. These commodities posted multi-year high prices lately. The company also benefited from increasing crop prices for soy, corn and rice.
Adecoagro reported first-quarter earnings on May 13. Gross sales increased 11.2% to $174.5 million and net sales increased 12.4% to $170.3 million YoY. Adjusted net income was $54.5 million in the first quarter, representing an increase of 24.4%. Adjusted net income per share was 47 cents, up 25.2% compared to the prior year period. Cash and equivalents stood at $208.6 million, down 11.4% from the prior year period.
“During the past 5 years, we have invested approximately $400 million across all our businesses, in projects that are generating ROICs of over 25%,” CEO Mariano Bosch said in a statement. “These investments have improved the efficiency and sustainability of our operations, enhanced our competitive advantages and allowed us to be better positioned to face all different scenarios.”
In May, AGRO stock hit a record high. Forward price-to-earnings (P/E) and (P/S) ratios are 8.73 and 1.47, respectively. Commodity prices tend to be choppy. Given how far the shares are up in 2021, short-term profit-taking is likely. Interested investors would find better value at $10 or even below.
Canadian Natural Resources (CNQ)
Calgary, Canada-based Canadian Natural Resources is one of the largest oil and natural gas producers with a diversified portfolio of assets in North America, the U.K.’s North Sea and offshore Africa. The company is an independent energy producer providing a broad portfolio of natural gas, light crude oil, heavy crude oil, bitumen and synthetic crude oil.
Canadian Natural Resources reported first-quarter financial results on May 6. Revenue increased to 6.6 billion CAD in the first quarter. A year ago, it had been 4.5 billion CAD. Adjusted net earnings from operations of 1.22 billion CAD translated into $1.03 CAD per diluted shares. Free cash flow was 1.4 billion CAD.
“With our strong measures in place we have minimized impacts on our operations, but it remains a daily challenge for our field staff to do it safe and do it right,” President Tim McKay said. “As the global vaccine distribution increases and crude oil demand recovers, especially in the United States, we are seeing improved commodity pricing.”
CNQ stock recently saw a multi-year high. Forward P/E and P/S ratios are 10.94 and 2.39, respectively. A potential decline toward the $32.5 level would improve the risk/return profile.
Inflation Hedge: Citizens Financial Group (CFG)
Providence, Rhode Island-based Citizens Financial Group is a retail bank. With about 1,000 branches, its operations are primarily in the New England, Mid-Atlantic and Midwest regions. The bank offers consumer and commercial banking operations. CFG had $187.2 billion in assets as of March 31.
Citizens Financial Group reported Q1 financial results on April 16. Total revenue in the first quarter was almost same as a year ago at $1.66 billion. Net income of $611 million translated into diluted EPS was $1.37 in the first quarter. CFG recorded a negative provision for credit losses of $140 million, compared to credit losses of $124 million in the fourth quarter.
“We are making good strides in our digital and next generation technology initiatives, and maintain a confident outlook for the balance of the year,” CEO Bruce Van Saun said. “[W]e increasingly see positive signs that the economy is improving rapidly and that life is returning to normal.”
Like most banks, Citizens Financial sustained a net interest income hit during the period of low interest rates. However, CFG stock recently hit an all-time high. It is likely that investors are pricing in rising interest rates that could lead to higher revenue.
The stock’s forward P/E and P/S ratios are 11.56 and 3.06, respectively. A potential decline toward $47.5 would make the shares more attractive longer-term.
Essex Property Trust (ESS)
San Mateo, California-based Essex Property Trust is a REIT that could offer a port in an inflation storm. The company acquires, develops and manages multifamily apartment communities on the West Coast — specifically in the San Francisco, Southern California, Seattle and Portland.
Essex Property Trust reported first-quarter financial results on April 27. Same-property gross revenue declined 8.1% YoY to $317.8 million. Net operating income was $44.4 million, down 12.3% YoY. The company reported net income per diluted share of $2.59 in the first quarter, down 46%. Cash and equivalents at end of the quarter fell 60% YoY to $113.36 million.
“Although the West Coast markets are still in the early stages of an economic recovery, we are cautiously optimistic that declining COVID cases and widespread vaccinations will provide a foundation for a long economic expansion.” CEO Michael J. Schall said. “Encouragingly, the large tech employers in our markets have accelerated hiring and are beginning to reopen their offices which should improve apartment demand, consistent with our expectations at the beginning of the year.”
In April, ESS stock saw a multi-year high. Forward P/E and P/S ratios are 73.53 and 12.89, respectively. With a market capitalization (cap) of about 19 billion, Essex Property is one of the most important names in the multifamily REIT space. Interested investors would find better value around $275.
Inflation Hedge: iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT)
Over the past year, commodities have been hot. The Street is debating whether a multi-year supercycle is here. Our next discussion centers around an exchange-traded fund (ETF), namely the iShares GSCI Commodity Dynamic Roll Strategy ETF. It invests in a range of commodities. In addition to commodity futures contracts, it also invests in individual shares – thus it pays a small dividend.
COMT trading in October 2014 and assets under management stand at $764 million. The current sector weightings are: energy (53.61%), agriculture (21.02%), industrial metals (13.12%), livestock (6.78%) and precious metals (5.47%).
The fund recently hit a multi-year high. Investors are likely to benefit from the diversification offered by COMT. A potential decline toward $30 would improve the margin of safety for long-term portfolios.
West Fraser Timber (WFG)
Canadian West Fraser Timber is a diversified wood products group. It produces lumber, engineered wood, and other products including pulp, newsprint, wood chips and renewable energy. The company has more than 60 facilities in Canada, the U.S., the U.K. and continental Europe.
The past year brought a hot housing market as well as lumber shortage. A a result, lumber prices have skyrocketed, fueling the profitability of stocks like West Fraser Timber.
The group reported Q1 metrics on May 6. Sales increased 163% YoY to $2.34 billion. Earnings skyrocketed to $665 million and diluted EPS came at $6.96. Cash and short-term investments stood at $1.40 billion in the first quarter. Total liquidity at the end of the quarter was $2.55 billion.
On the earnings call for Q1 2021 results, CEO Ray Ferris said, “While we recognize there are many factors outside of our control that can temporarily influence markets … we remain optimistic about the favorable market fundamentals we’re currently seeing, supported by the underlying environmental benefits of building with wood, which have never been more clear and more widely accepted.”
WFG stock reached an all-time high in early May. Forward P/E and P/S ratios are 3.59 and 0.99, respectively. Lumber is currently taking a breather from its meteoric rise. As a result WFG shares have also come under short-term pressure. Readers who are bullish on lumber would find better value around $75 or below.
Inflation Hedge: Wheaton Precious Metals (WPM)
Canadian Wheaton Precious Metals holds low-cost, long-life assets, including a gold stream on Vale’s Salobo mine and a silver stream on Newmont’s Penasquito mine. The miner has agreements for 23 operating mines and eight development-stage projects.
Wheaton Precious Metals reported first-quarter financial results on May 5. Sales increased 27.2% YoY to $324 million. Adjusted net earnings increased 53.6% to $161 million. Adjusted EPS surged 53.6% YoY to 36 cents. Operating cash flow was $232 million.
“As a result of these strong results, we have increased our dividend for the third quarter in a row and now have net cash on the balance sheet, which we will look to deploy to further grow our sector-leading portfolio,” CEO Randy Smallwood commented. “We are excited to report our first production of cobalt from the Voisey’s Bay mine in Canada.”
WPM stoc recently saw a multi-year high. Forward P/E and P/S ratios are 30.21 and 17.47, respectively. A potential decline toward $45 would improve the margin of safety.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.