- While the Federal Reserve tries to manage inflation, the macro environment presents challenges to investors seeking resilient stocks to buy.
- Newmont (NEM): A quality gold miner with a strong asset base and a healthy balance sheet. Likely to trend higher as precious metals gain on inflation.
- Freeport-McMoRan (FCX): A beneficiary with copper trending higher. Improved balance sheet provides flexibility to pursue production growth.
- Pfizer (PFE): A low-beta stock that caters to necessity. Undervalued with a healthy growth outlook for 2022.
- Lundin Energy (LNDNF): A hidden gem from the energy sector. Merger with Aker will create one of the biggest oil products in the NCS. Low break-even assets.
Rampant inflation is possibly the biggest challenge that policymakers face in the coming quarters. Inflation is already at a 40-year high at 8.5% and seems more than just transitory. As inflation remains stubborn, investors need to consider stocks to buy that tend to out-perform in this macro-economic environment.
Federal Reserve Chairman Jerome Powell has reiterated that central bank is committed to taming inflation. A 50-basis-point rate hike is on the cards in May 2022. However, real interest rates will still remain negative. Also given some geo-political and supply chain factors, taming inflation will prove to be challenging.
In times of inflation, precious metals tend to out-perform. I would also look at industrial commodities, which are among the most undervalued asset classes. Another factor during high inflation is to go over-weight on necessity rather than luxury. In particular, with an expectation of a potential recession in 2023.
Let’s look at four stocks to buy for an inflationary environment.
|LNDNF||Lundin Energy AB||$41.00|
Newmont Corporation (NEM)
With surging inflation, it’s important to have physical gold and gold mining stocks in the portfolio. Newmont Corporation (NYSE:NEM) seems like a top stock to buy from the mining sector.
NEM stock has surged by almost 35% in the last six months. However, considering the growth visibility, there is more upside potential. I would add here that the stock has a dividend yield of 2.66% and with swelling cash flows, dividend pay-out will likely increase.
From an asset perspective, Newmont has 96 million ounces of gold reserves and 112 million oz of resources. With more than 10-years of gold reserve life, there is clear production visibility. Further, 91% of the company’s assets are in Americas and Australia with low geo-political risk.
Another reason to like Newmont is a healthy EBITDA margin visibility. The company expects all-in-sustaining-cost to decline to $880 – $980 an ounce with gold price assumption at $1,800 an ounce. Last year, Newmont reported free cash flow of $2.6 billion. As gold trends higher, it’s likely that FCF will swell further.
After surging to recent highs of $86.4. NEM stock has declined to around $75 levels. I believe that the stock is worth accumulating around $70 levels.
Freeport-McMoRan Inc. (FCX)
Commodities have been among the worst performing asset classes over a 20-year period. The Bloomberg Commodity Index has shown annualized returns of 2.4% during this period.
However, there seems to be a reversal in the long-term trend with the BBG Commodity Index returning 49.25% in the last 12 months. With inflationary pressure and the demand outlook for certain industrial commodities, the upside is likely to sustain. Freeport-McMoRan (NYSE:FCX) is among the top stocks to buy with inflation surging to a 40-year high. In inflationary times, it’s always better to be invested in a commodity producer than a commodity consumer.
Recently, Goldman Sachs predicted that copper prices will likely to hit an all-time high by mid-year, climbing to $13,000 per metric ton by the end of 2022. Even with Freeport trimming production guidance, the stock is poised to trend higher as price realizations increase.
For Q1 2022, Freeport reported operating and free cash flow of $1.7 billion and $1.0 billion respectively. This would imply an annualized FCF potential of $4.0 billion.
Freeport has ample financial flexibility to increase dividends and further deleverage. The company’s net debt has declined to $1.3 billion as of Q1 2022.
I am also bullish on copper for the next few years. High investment in renewable energy and electric vehicle sector will spur for the commodity. FCX stock is therefore worth holding for the next few years.
Pfizer Inc. (PFE)
In times of high inflation, I would prefer to remain exposed to necessity. It also makes sense to consider undervalued stocks with a low beta, particular with some expectation of recession in 2023. A quality name among stocks to buy would be Pfizer (NYSE:PFE).
PFE stock trades at a forward price-to-earnings-ratio of less than 10 and also offers investors a healthy dividend yield of 3.3%.
Pfizer also has robust revenue and cash flow visibility for 2022. This is primarily supported by healthy sales of the vaccine against Covid-19.
However, Pfizer is also an attractive long-term bet. The company has a deep pipeline of drugs that are in various stages of clinical trials. The pipeline is likely to ensure steady growth over the next few years.
It’s worth noting that the big upside in cash flows has also increased the company’s appetite for acquisitions. In the last two quarters, Pfizer has made several acquisitions to deepen the product pipeline.
Overall, I would be invested in PFE stock in uncertain times. A 3.3% dividend yield is an additional bonus with inflation surging. Given the valuation, it’s likely that PFE stock will be higher than current levels in the next six to 12 months.
Lundin Energy AB (LNDNF)
Brent oil has remained above $100 per barrel after discounting the geo-political risk premium. Energy stocks are among the top-picks in times of inflation. A lot has been discussed about stocks like Chevron (NYSE:CVX) and Marathon Oil (NYSE:MRO). However, there are some hidden gems in the energy sector. Lundin Energy (OTCMKTS:LNDNF) is one name that investors can consider.
In December 2021, Aker BP and Lundin agreed on a merger. This has created one of the largest entities operating on the Norwegian Continental Shelf. To put things into perspective, the merged entity will have reserves and resources of 2.7 billion barrels.
Further, pro-forma production for 2022 is expected at 400 million barrels of oil equivalent per day (mboepd). The company has also guided for production increase to 525 mboped by 2028. Besides the growth trajectory, another reason to be bullish is an attractive break-even for assets.
In the last 12 months, Lundin (standalone) generated $3.1 billion in operating and $1.6 billion in free cash flows. With Brent trading above $100 per barrel, there is clear visibility for the merged entity to deliver operating cash flow in excess of $5.0 billion.
Strong cash flow potential also makes Lundin attractive from a dividend growth perspective. LNDNF stock already offers a dividend yield of 4.45%.
On the date of publication, Faisal Humayun did not hold (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.