Inflation is one of the biggest threats facing the economy. This is evident by looking at public polling, consumer sentiment, recent earnings reports, and statements from government officials. And it’s something to keep in mind when looking for stocks to buy.
About 80% of companies that reported earnings in the third quarter cited factors like supply chain challenges, the difficulty of finding labor and rising costs in their conference calls. This is a sharp contrast to the last decade, when the biggest challenge was deflation and low demand. Investors will certainly have to adjust their approach and strategy in order to profit in this environment.
One profitable strategy during this time of high inflation is to focus on stocks that have pricing power, as these companies’ margins will continue to expand. In contrast, stocks without pricing power are likely to underperform as margin compression erodes EPS.
Therefore, investors should consider these three stocks to buy that are thriving in this inflationary environment:
Stocks to Buy for Inflation: Olin (OLN)
OLN is a global maker of chemical products, focusing on three segments: Chlor Alkali Products and Vinyls; Epoxy; and Winchester. The company works through both its sales personnel and direct sales to industrial clients, wholesalers and more, as well as the United States Government and its prime contractors.
OLN is a great pick for an inflationary environment because its chemicals are used in all sorts of industrial processes. This gives it pricing power as its customers who need those chemicals have no choice but to accept higher prices. Further, OLN has a dominant market share in many categories which means that it’s benefitting from a strong industrial recovery.
Another indication of its strength is found in its recent earnings report, with the major highlight being the company’s authorization of a $1 billion buyback. It also saw a 63% year-over-year increase in revenue. Net income had a major turnaround, going from a loss of $736.8 million in last year’s Q3 to a profit of $390.7 million this year.
Its outlook remains bright, as analysts are expecting the company’s full-year EPS to reach $8.64 which implies a forward P/E of 5.7. EPS should also get another lift from the buyback program, which is accretive by about 12%.
OLN’s POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to “strong buy” in our proprietary rating system. A-rated stocks have posted an average annual performance of over 30%. To see the complete POWR Ratings for OLN, click here.
TX manufactures, sells, and distributes steel. It’s currently one of the largest steel companies in the world and operates through two segments — steel and mining. The Luxembourg-based company also provides other services, including financial and engineering.
Steel companies are also likely to outperform in the current environment. The major factor is that construction activity, infrastructure spending, and industrial production are all expanding at a rapid rate and are projected to remain strong over the next few years. Further, in an inflationary environment, a steel company’s assets also appreciate in value as the cost of building new production also increases. Further as a provider of inputs, it also tends to have more pricing power.
These positives are evident in TX’s recent earnings report as its profit margins reached 23% which is a significant improvement from its pre-pandemic 5% profit margin. The company also reported 115% revenue growth. It also had an incredible spike in earnings from a loss last year to $6.12 per share this year.
Further, earnings are expected to continue growing, albeit at a slower pace. Despite this earnings growth, TX is quite cheap with a forward P/E of 4.2 which is significantly cheaper than the S&P 500’s forward P/E of 21. Wall Street is also bullish on the stock as four out of six analysts covering it have a buy rating with a consensus price target implying nearly 40% upside.
TX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to “strong buy” in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Not surprisingly, the stock has a B for Growth and Value which isn’t surprising considering its low P/E and massive earnings growth. To see TX’s complete POWR Ratings, click here.
Stocks to Buy for Inflation: Chemours (CC)
The last of our stocks to buy for inflation, CC stock, is a manufacturer and distributor of performance chemicals. The company is based in Wilmington, Delaware and is a spinoff of Dupont (NYSE:DD). It operates all over the world and has four major units: Titanium Technologies; Thermal & Specialized Solutions; Advanced Performance Materials; and Chemical Solutions.
Like OLN, CC will benefit from an inflationary environment as its chemicals are inputs for all types of products. However, one of its largest revenue sources is titanium dioxide, which is a key ingredient for white paint. Therefore, CC is also connected to the housing industry.
Housing is one of the strongest parts of the economy, and there is no stopping its momentum due to favorable supply and demand dynamics. In part, this is a reflection of the strong labor market, rising wages, low rates, and strong household balance sheets. Such strong fundamentals also mean it’s likely we will see more home improvement and renovation projects which will also benefit CC.
These positive fundamentals were also reflected in CC’s recent earnings report which showed a 36% increase in revenue to $1.7 billion. The company’s gross profit increased 66.1% to $427 million, and net income surged 181.6% to $214 million. Overall, EPS grew by 176% to $1.27.
The company’s momentum is expected to continue, with projections for $4.11 in full-year EPS, more than double last year’s figure. It also means shares are remarkably cheap with a forward P/E of 7.2 and a dividend yield of 3%.
CC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to “strong buy” in our POWR Ratings system. The POWR Ratings also evaluates stocks by various components to give investors additional insight. The stock has an A for Quality which makes sense considering that Wall Street has a consensus price target of $43.29, implying 30% upside from current levels. Click here to see CC’s full POWR Ratings.
On the date of publication, Jaimini Desai did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Jaimini Desai has been a financial writer and reporter for nearly a decade. He has helped countless investors take profitable rides on some of the hottest growth trends. His previous experience includes writing for Investopedia, Seeking Alpha, and MT Newswires. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters.
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