Inflation is up but yields drops… what this suggests for the market… a specific stock Louis likes as an inflation hedge and a way to ride the housing boom

 

There’s growing reason to believe that inflation might not be as awful as many feared.

That was the broad takeaway of last Friday’s Digest featuring analysis from our technical experts, John Jagerson and Wade Hansen.

Today, let’s build on that with help from legendary growth investor, Louis Navellier.

In short, though Louis says that inflation has “arrived in a big way,” it’s not showing up in the bond market. And that’s good news for stocks.

So, in today’s Digest, let’s see how Louis is analyzing recent inflation numbers, and what they mean for your money.

But then we’ll do you one better, by highlighting a specific stock Louis holds in his Growth Investor portfolio.

If inflation keeps climbing, this company will be able to pass along that cost to consumers, which will help protect margins. On top of that, the company has the additional tailwind of today’s surging real estate market.

Lots to unpack, so let’s jump in.

***A closer look at the latest inflation numbers

For newer Digest, readers, Louis is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively-strong stocks. Forbes even named him the “King of Quants.”

This numbers-approach has helped him produce decades of triple-digit winners for his private clients and subscribers. Today, he’s one of the most respected, veteran analysts in the industry.

So, with this focus on data at the heart of his market approach, what’s Louis’ take on the recent inflation data from last week?

Louis began answering that question by recapping the latest figures. He noted that the Consumer Price Index (CPI) climbed 5.0% over the last 12 months, the largest bump since the year-long period ending August 2008.

Meanwhile, the core-price index, which excludes categories with high volatility like food and energy, increased 3.8% in May from a year prior. That was the largest such increase since June 1992.

Despite these numbers, Louis says that surging inflation is not the big news…

Instead, it’s the fact that the 10-year Treasury yield has been dropping for days and is now sitting below 1.5%.

Some people are shocked and wondering how interest rates could be dropping with rising inflation. But when you dig into the details of the latest CPI readings, what looks to be happening is giving more and more credence to the Federal Reserve’s view that this recent inflation is transitory.

Let’s pause here to make sure we’re all on the same page.

The 10-Year Treasury note, or “10-year,” is a key global benchmark interest rate. As it goes, so goes countless other interest rates (one of the most notable is your mortgage rate).

Investors often use the 10-Year’s yield as a gauge for the market. It can be viewed as a sign of investor sentiment about the economy.

When investors feel confident, the 10-Year’s yield often rises as its price drops (bond yields and prices are inversely correlated). This reflects investors’ belief that they can find higher-returning investments elsewhere without assuming too much risk.

But a rising 10-Year yield can also reflect the state of inflation. As traders fear that the value of the dollar is weakening due to rising inflation, they would demand a higher yield on the 10-Year to compensate.

But as Louis noted, that’s not happening. Despite the inflation report last week, the 10-Year’s yield has fallen. As I write Tuesday morning, it’s sitting right at 1.5%. That’s up from its recent low around 1.44%, but lower than its high last Tuesday, at roughly 1.53%.

So, the fact that we have higher inflation numbers and a lower 10-Year yield is big news. It suggests that traders don’t believe the current inflation we’re seeing will be long-lasting.

Back to Louis:

The bottom line is that while there may be inflation out there, it’s not showing up yet in the bond market. And that is good news for the stock market.

Even better news for my Growth Investor subscribers is that growth stocks still remain the best historical inflation hedge of all time…

I look for investors to continue to flock to inflation hedges like our Growth Investor stocks in the coming weeks and months. So, our Buy List stocks should profit from the inflation boom and represent an oasis for investors who are frustrated by the current low interest rate environment.

Let’s use Louis’ comments as a springboard into a specific Growth Investor stock that Louis likes today. It’s both an inflation-hedge and a way to play the surging real estate market.

***A specialty retail play for the housing boom

Let’s go straight to Louis:

The real estate market hit new records in May. According to Redfin, the median home sale price rose 24% year-over-year to a record-high of $354,250. Asking prices were also at records, climbing to a median $361,875.

Another new record includes the fact that 51% of homes sold above their initial listing price, a 26% year-over-year increase. Redfin also noted that houses sat on the market for an average 17 days, down from 36 days a year ago.

The truth of the matter is demand for housing is incredibly strong right now, and folks are looking to cash in.

If you don’t own real estate that doesn’t mean you can’t cash in too. You can simply invest in specific companies that are benefitting from the housing boom.

One such company is Restoration Hardware (RH). RH offers luxury home furnishings, including furniture, rugs, lighting and textiles. These furnishings are created by leading artisans, designers and manufacturers, and are available in the company’s brick-and-mortar retail galleries, as well as in catalogs, or source books, and online.

Back to Louis:

Given the influx in folks buying a new home, as well as many more nesting in their current homes amidst the pandemic, there’s been an increased demand for home furnishings, which has added handsomely to RH’s top and bottom lines.

Case in point: (last) Wednesday, RH released stunning first-quarter earnings results. Adjusted net income surged 375% year-over-year to $142.3 million, compared to net income of $29.9 million a year ago.

Adjusted earnings per share soared 285% to $4.89, up from earnings of $1.27 a year ago. Analysts were expecting earnings of $4.10, so the company posted a 19.3% earnings surprise. Revenue rose 78% year-over-year to $860.8 million.

Given the powerhouse earnings report, RH’s stock popped more than 16% last week. In the days since, it’s pulled back as investors have taken some profits.

***Louis’ free Portfolio Grader tool saw this coming

As a quantitative investor, Louis has strict investment rules that are rooted in cold, impartial numbers. When these rules trigger a buy, he buys. When they trigger a sell, he sells. It’s that black-and-white.

Fortunately for you and me, Louis has codified much of his proprietary system, and now offers it to the investment community in the form of his free Portfolio Grader tool.

Back to Louis:

Now, my Portfolio Grader already flagged the stock as a “Strong Buy” ahead of RH’s earnings report.

So, folks following my Portfolio Grader would’ve had an opportunity to buy in early and ride RH’s post-earnings wave.

This goes for my Growth Investor subscribers, too, as I recommended the stock on April 30, 2021.

Louis remains bullish on Restoration Hardware today based on these strong numbers. And looking forward, it appears the earnings strength will continue.

Back to Louis:

Full-year revenue is expected to grow between 25% and 30%, up from previous estimates for 15% to 20% growth. And for the second quarter, revenue is now forecast to increase between 35% and 37%, compared to previous forecasts for 25.9% to 26.1% growth.

Company management also noted, “While fiscal 2021 will surely be a tale of two halves, there are many data points that lead us to feel optimistic that our strong performance will continue through the second half of 2021 with growth reaccelerating in fiscal 2022 and beyond. These include a strong housing and renovation market, both with pent up demand and a long tail, a record stock market, low interest rates and the reopening of several large parts of our economy.”

Wrapping up, yes, inflation numbers are up in a big way, but if we look at the 10-Year yield, it suggests traders aren’t too worried.

In the meantime, Restoration Hardware is a good way to ride the inflationary data, while also profiting from the housing boom. If you’re looking to put some money to work today, give it a look.

We’ll keep you updated on inflation and the 10-Year yield here in the Digest.

Have a good evening,

Jeff Remsburg