Inflation has been making headlines over the past several weeks. Abundant liquidity, surging demand following pandemic lockdowns and supply-side constraints pressured prices stateside. In late June, the Federal Reserve increased its 2021 inflation forecast from 2.4% to 3.4%, significantly above its long-term target of 2%.
Former New York Fed President William Dudley recently said, the “spike in U.S. inflation is likely transitory for now, but it could become more persistent in the coming years as more people return to work.” While analysts debate whether higher inflation is likely to be transitory, many investors are nervous inflation could be here for the long term. Therefore, today I’ll discuss the seven inflation stocks for investors looking to protect their portfolios.
Recent research by the Fed found, “inflation expectations drive a wide range of decisions including consumption, saving, borrowing, wage bargaining, and thus have a direct impact on realized inflation. Inflation expectations therefore represent a key variable, closely monitored by policy makers.”
Rising interest rates often discourage risk-taking in the markets, and high-growth stocks could especially decline when concerns about inflation dominate. Therefore, it’s not surprising that investors want to play it safe and mitigate the effects of inflation.
With that information, here are seven inflation stocks that could potentially gain from an inflationary environment:
- IQ Real Return ETF (NYSEARCA:CPI)
- Mosaic (NYSE:MOS)
- Nutrien (NYSE:NTR)
- Physicians Realty Trust (NYSE:DOC)
- Pioneer Natural Resources (NYSE:PXD)
- VanEck Vectors Agribusiness ETF (NYSEARCA:MOO)
- VanEck Vectors Rare Earth/Strategic Metals ETF (NYSEARCA:REMX)
Inflation Stocks: IQ Real Return ETF (CPI)
Our discussion starts with an exchange-traded fund (ETF), namely the IQ Real Return ETF. The fund’s objective is to provide investors with a real return, or a return above the inflation rate, as represented by the Consumer Price Index (CPI), which is regarded as “the most widely used measure of inflation” stateside.
The ETF was first listed in October 2009 and has $53.3 million net assets.
CPI, which tracks the IQ Real Return Index, invests in other ETFs. It currently has 16 holdings, and the leading 10 names make up about 95% of the total fund. The highest share (24.94%) belongs to the IQ Ultra Short Duration ETF (NYSEARCA:ULTR) that invests in corporate bonds, commercial paper and asset- and mortgage-backed securities. Year-to-date (YTD), ULTR is up about 0.22%.
Next ETFs in line are:
- iShares Short Treasury Bond ETF (NASDAQ:SHV): down 0.21% YTD; it has a weighting of 23.05%.
- SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (NYSEARCA:BIL): down 0.07% YTD and has a weighting of 18.96% share.
- Invesco CurrencyShares Japanese Yen Trust (NYSEARCA:FXY): down 6.85% YTD and has a weighting of 9.61% share.
So far in 2021, the IQ Real Return ETF is up 1.1%. It could be an appropriate fund for those who are looking to park their cash short-term.
Mosaic (MOS)
Tampa, Florida-based Mosaic produces primary crop nutrients phosphate and potash. Company assets include phosphate rock mines in Florida and potash mines in Saskatchewan, New Mexico and Brazil.
Mosaic released Q1 financials in early May. Top-line grew by 28% year-over-year (YoY) to $2.3 billion. Net income came in at $157 million, compared to a $203 million net loss in the prior year quarter. Adjusted EPS stood at 57 cents, compared to an adjusted net loss of 6 cents in the prior-year quarter. Mosaic ended the quarter with $706 million in cash and equivalents.
“We are demonstrating the earnings power resulting from the combination of our long-term cost structure improvements and strong global fertilizer markets,” CEO Joc O’Rourke said.
MOS stock currently hovers slightly below $31, up almost 36% YTD. It has gained 160% over the past 12 months. Forward P/E and current P/S ratios are 10.57 and 1.30, respectively. Despite the solid gains in recent months, the shares are likely to offer shareholder value in future quarters, too.
Inflation Stocks: Nutrien (NTR)
Canadian group Nutrien is the world’s largest fertilizer producer by capacity. The group produces three primary crop nutrients – nitrogen, potash, and phosphate. In addition, the company is the largest agricultural retailer in the U.S., selling fertilizers, crop chemicals, seeds, and services through its physical stores and online platforms.
Nutrien reported Q1 earnings in early May. Total revenue soared by 11% YoY to $4.66 billion. Net earnings stood at $133 million compared to a net loss of $35 million a year ago. First-quarter adjusted net earnings came in at 29 cents per share. Thanks to rising commodity prices, Nutrien generated $476 million in free cash flow, more than double that of the prior-year quarter.
CEO Mayo Schmidt highlighted that earnings and free cash flow results were an indication of the strength of the company’s integrated business model as well as the recovery in global agricultural markets.
NTR stock continues to move higher as demand for crop nutrients surge in key markets worldwide. The company announced plans to expand potash production by a million tons over the next six months due to tight supply in the global market.
Nutrien also increased the first-half 2021 earnings guidance. The company now forecasts earnings to be in the range of $2.30 to $2.50, up from its prior guidance of $2.00 to $2.20.
The shares hover around $59, up almost 23% YTD. Forward P/E and P/S ratios stand at 19.27 and 1.63, respectively. A potential dip toward $55 would improve the margin of safety for interested investors.
Physicians Realty Trust (DOC)
Milwaukee, Wisconsin-based real estate investment trust (REIT) Physicians Realty Trust acquires and leases healthcare properties to physicians, hospitals, and healthcare delivery systems. The trust’s $5 billion portfolio includes medical office buildings, outpatient treatment and diagnostic facilities, physician group practice clinics, ambulatory surgery centers and specialty hospitals.
Physicians Realty Trust reported Q1 results in early May. Revenue increased by 5.5% YoY to $113.3 million. Net income stood at $17.8 million, representing a 19% YoY increase. Diluted EPS came in at 8 cents compared to 7 cents in the prior-year quarter.
On these results, CEO John T. Thomas said, “We are off to a very good start in 2021, with excellent operating results and substantially all of our providers back to pre-pandemic volumes and performance.”
REITs are a good source of dividend income as U.S. regulations require them to pay out at least 90% of their taxable income as dividends. DOC stock’s juicy dividend yield of almost 5% makes it particularly attractive for income investors.
The stock hovers slightly below $19, up almost 7% YTD. In mid-May, S&P upgraded the company’s corporate credit rating to BBB with a stable outlook. Forward P/E and P/S ratios stand at 54.35 and 9.19, respectively. A potential decline toward $17 would make the shares more attractive for buy-and-hold investors.
Inflation Stocks: Pioneer Natural Resources (PXD)
Pioneer Natural Resources is an independent oil and gas exploration and production company focusing on the Permian Basin in Texas. Oil and natural gas liquids represent about 80% of production.
The company released Q1 results in May. Total revenue went up by 8% YoY to $2.44 billion. Non-GAAP adjusted income was $396 million, or $1.77 per diluted share. Cash flow from operating activities stood at $377 million, leading to a free cash flow of $369 million for the quarter.
“With an incremental $5 billion in free cash flow expected to be generated from DoublePoint assets through 2026, Pioneer currently anticipates delivering approximately $23 billion of free cash flow during the same period at strip pricing,” CEO Scott D. Sheffield said. “We expect to return approximately 80% of this free cash flow through our base and variable dividend structure, strengthening our value proposition to shareholders.”
Pioneer plans to limit its production growth, increase cash flows and return around 80% of it to shareholders as dividends over the long term. The company boasts having the lowest costs per barrel of any U.S. shale producer. Management anticipates the current 1.4% dividend could increase significantly over the next two years.
PXD stock hovers around the $160s, up 1% YTD. It currently trades within 10% of its 52-week peak in May. Forward P/E and current P/S ratios stand at 13.74 and 3.60, respectively. Interested readers could consider buying the dips.
VanEck Vectors Agribusiness ETF (MOO)
The VanEck Vectors Agribusiness ETF gives access to businesses involved in animal health, agri-chemicals, fertilizers, seeds, farm equipment, livestock, as well as trading of agricultural products. MOO currently includes 52 stocks. The top 10 holdings constitute more than 50% of total net assets of $1.25 billion.
In terms of country weightings, the U.S. tops the list with about 57%, followed by Germany (7.15%), Canada (6.28%), Japan (5.05%) and China (4.82%). The most significant sectors are consumer staples (27.9%), healthcare (25.8%), materials (23.2%) and industrials (19.8%). Among the largest holdings are Zoetis (NYSE:ZTS), Deere (NYSE:DE), Idexx Laboratories (NASDAQ:IDXX), Nutrien and Bayer (OTCMKTS:BAYRY).
So far in the year, MOO is up close to 17%. Buy-and-hold investors could regard the $87 level or below as a better entry point. In addition to inflationary pressures, improving global economies and demographics provide support to the names in the fund.
Inflation Stocks: VanEck Vectors Rare Earth/Strategic Metals ETF (REMX)
Our final discussion also focuses on a fund, namely the VanEck Vectors Rare Earth/Strategic Metals ETF. It invests in firms producing, refining and recycling rare earth metals and minerals.
REMX, which has 20 holdings, was first listed in October 2010. Assets under management are about $748 million. The 10 largest stocks constitute more than 60% of the fund. Chinese firms lead the ETF roster with almost 45%, followed by Australia (28.4%) and the U.S. (14.1%).
Among the leading names are China Molybdenum (OTCMKTS:CMCLF), Zhejiang Huayou Cobalt, Lynas Rare Earths (OTCMKTS:LYSDY) and Galaxy Resources (OTCMKTS:GALXF).
These metals are used in high-tech products (such as electric vehicles, aerospace, and consumer electronics). As a result, their use and importance have been on the rise. In the past year, this niche fund has returned about 143%, and YTD it is up 25.8%. A decline toward $80 would improve the margin of safety for investors.
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 three 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.
