How to Profit in an Inflationary Environment

What a wild couple of days it’s been for the stock market!

inflation, calculator

Source: Sauko Andrei / Shutterstock

On Monday, the broader market plummeted as investors panicked over negative news of rising tensions between Russia and Ukraine, protests in Canada, surging energy prices and the Federal Reserve’s special closed-door meeting. The S&P 500 and Dow Jones Industrial Average fell more than 1%, though they did rebound in the afternoon.

Then today, stocks surged on reports that tensions were easing between Russia and Ukraine, as Russia announced that it is removing some of its troops from the Ukrainian border. Investors cheered the news, and the S&P 500 and Dow climbed more than 1% higher.

Today’s rally is particularly interesting because there was also some very bad news released this morning. I’m talking about the horrific Producer Price Index (PPI) report. Here’s what I said to my Growth Investor subscribers in my Special Market Podcast this afternoon:

“The PPI report was horrific. I guess the easiest way to describe it is inflation is structural. The food inflation was up 1.6% on the wholesale level in January. Energy inflation was up 2.5%. Overall PPI is up 1%. When we exclude food and energy and trade margins, it was still up 0.9%. A lot of the inflation we have now is structural, it’s service-cost related, built in.”

This is a problem for the Fed because it’s going to be very difficult for the central bank to unwind that type of inflation. Now, while St. Louis Fed President James Bullard is calling for a full 1% interest rate hike by July 1, the fact of the matter is the Fed can’t raise interest rates very much.

The U.S. federal government’s total debt now exceeds $30 trillion, and the annual interest burden is massive because it exceeds the Defense Department’s annual budget. Even if the federal government taxes everyone at 100%, the federal budget deficit would remain at over $10 trillion, so we cannot tax our way out of this fiscal mess.

With that said, I would not be surprised if the Fed announces that it’s going to raise the discount rate with the federal fund rates. However, the discount rate is more of an “inner bank” thing, so it’s not something we really need to worry about.

Ultimately, I expect the central bank to stay the course. And I said exactly that in my Growth Investor Special Market Podcast earlier today:

“They [the Federal Reserve] do not want to change what they said before. Right now, they’re unwinding their quantitative easing and will raise rates at the end of March. Could it be 50 basis points? Possibly. Some are calling for five to seven rate increases, but the best case is three to four.”

So, what should our takeaway be as investors?

First, I would expect more relief rallies on any news related to Russia and Ukraine moving closer to a resolution. The reality is Wall Street is easily distracted by the global political events. In turn, the stock market feels the effects.

The Stock Market: A Hedge Against Inflation

Second, the stock market is a natural hedge against inflation. The fact remains that stocks are a great inflation hedge. The shares of companies that can sustain strong sales and earnings growth, as they raise prices to offset inflationary pressures, are particularly attractive right now, i.e., fundamentally superior companies.

Case in point: Fortinet (NASDAQ:FTNT).

Fortinet operates in the lucrative cybersecurity space, as it provides unified security solutions that can be deployed over digital networks to protect users against malware, spam and network intrusions.

Cybersecurity stepped front and center over the past two years, as data breaches escalated with more folks working remotely. In fact, the IBM Cost of a Data Breach Report 2021 revealed that the average cost of a data breach was between $3.86 million and $4.24 million on an annualized basis in 2021. And the average cost was $1.07 million higher when remote work was involved.

Needless to say, Fortinet’s services and products have been in top demand as individuals and businesses upgrade their security efforts. And that demand has added nicely to Fortinet’s top and bottom lines.

On Feb. 3, Fortinet released better-than-expected results for its fourth quarter and fiscal year 2021. During the fourth quarter, revenue rose 28.8% year-over-year to $963.6 million, beating estimates for $960.46 million. Product revenue accounted for $378.9 million, while service revenue accounted for $584.7 million. The company noted that total billings increased $1.31 billion, and bookings rose to $1.43 billion in the fourth quarter.

Fourth-quarter earnings grew 17.3% year-over-year to $205.8 million, or $1.23 per share, compared to $175.5 million, or $1.06 per share, in the fourth quarter of 2020. Analysts were expecting earnings of $1.15 per share, so Fortinet posted a 7% earnings surprise.

For fiscal year 2021, Fortinet achieved total revenue of $3.34 billion and earnings of $666 million, or $3.99 per share. That represented 28.8% annual revenue growth and 18.4% annual earnings growth. These results also topped estimates for earnings of $3.91 per share on $3.34 billion in revenue.

Fortinet noted that it has achieved revenue growth of 20% or more for three-straight years, and company management stated, “Given our robust pipeline and strong business momentum, we expect several more years of solid growth as Fortinet is well-positioned to address our $174 billion market opportunity.”

So, looking forward to fiscal year 2022, Fortinet expects revenue between $4.275 billion and $4.325 billion and earnings per share between $4.85 and $5.00. That outlook is nicely higher than analysts’ current expectations for 2022.

FTNT shares rallied nicely ahead of its earnings release and popped 6% in the wake of its strong results. And this is just one example. You may recall that we’ve discussed other stocks that have made similar moves following their earnings beats in Market360 articles last week, like The Walt Disney Co. (NYSE:DIS), Procter & Gamble (NYSE:PG) and Regional Management Corp. (NYSE:RM) — just to name a few. (If you haven’t read them yet, you can catch up here.)

We’re now about 75% of the way through the fourth-quarter earnings season, but there are still plenty of good earnings releases in the pipeline, especially in Growth Investor. I have 11 Growth Investor Buy List companies reporting this week, and I fully expect them to report wave-after-wave of strong earnings results and attract investors’ attention.

The bottom line: earnings are working.

To make sure you’re on the right side of this earnings season, I encourage you to sign up for Growth Investor today. My Buy Lists are chock-full of fundamentally superior stocks that are poised to emerge as the stock market leaders in the coming months.

For full details, just click here.



Louis Navellier

P.S. There is a great divide opening up in America — and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.

On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.

What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.

Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.

It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.

It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.

It’s free to watch, and by doing so, I know you’ll be ahead of everyone else struggling to understand what is really going on.

The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Walt Disney Co (DIS), Fortinet Inc (FTNT)

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