Stocks To Play Rising Inflation: Travelers, Exxon, U.S. Bank

CVX: Chevron logo

Inflation has been trending higher, driven by expansionary monetary policy by central banks, pent-up demand for commodities following the Coivd-19 lockdowns, moves by companies to replenish or build up inventory, and also due to significant supply-side constraints. Now inflation appears to be here to stay, with the 10-Year Breakeven Inflation rate, which captures expected inflation rates over the next ten years standing at around 2.4%, around the highest levels it has been since 2013. [1]

So how should equity investors play the current inflationary environment? Our theme on Stocks To Play Rising Inflation includes stocks that could remain stable or potentially even gain from higher inflation rates. The theme has outperformed, returning about 18% year-to-date, compared to a return of just about 12% on the S&P 500. However, it has underperformed since the end of 2019, returning just about 1% Since versus 30% for S&P 500. The theme is predominantly comprised of stocks from the banking, insurance, consumer staples, and energy sector, which stand to benefit from higher inflation in the longer run. We have excluded sectors such as metals, building materials, and semiconductor manufacturing which have fared exceedingly well through the initial reopening but look poised to peak.  Here is a bit more about the stocks and sectors in our theme.

Banking Stocks: Banks make money off the net interest spread, which is essentially the difference between interest rates on deposits and interest rates the bank receives from loans it makes. Now higher inflation typically results in rising interest rates and this, in turn, can help banks boost their net interest income and earnings. Separately, banks also stand to benefit from increased credit card spending by consumers. Banks in our theme include Citigroup (C) and U.S. Bank (USB): – which have a higher exposure to the retail banking space. Citi stock is up by 26% year-to-date, while U.S. Bancorp is up 28%.

Relevant Articles
  1. Chevron Stock To Trade Higher Post Q2?
  2. Is Chevron Stock A Buy?
  3. How Will The Inflation Theme Fare As Big Rate Hikes Loom?
  4. Company Of The Day: Chevron
  5. Is There A Better Oil Industry Pick Than Continental Resources Stock?
  6. Will Hess Corporation Stock Continue Higher?

Insurance stocks:  Insurance companies typically invest excess capital from underwriting to generate interest income. Now higher inflation, which leads to higher interest rates, can also help boost their profitability. Companies such as The Travelers Companies (TRV) and Chubb (CB), which are more reliant on investment income compared to peers in the insurance space, should stand to benefit. Travelers stock is up by about 12% this year, while Chubb is up 8%.

Consumer staples: Consumer stocks should also hold up well in the face of higher inflation. Demand for these companies remains stable as they deal with essential products., and these companies can also pass on higher costs to customers. Our theme includes Tobacco giant Altria Group, (MO) which is up 21% this year, food, and beverage major PepsiCo (PEP) which is roughly flat, and consumer products player Procter & Gamble (PG), which is down about 1%.

Oil and Gas:  Energy stocks have a nice track record of performance during periods of rising consumer prices. While expanding economies should bode well for oil demand and pricing, big oil companies also have high operating leverage which helps them deliver higher profit as revenue grows. Picks in our theme include oil and gas bellwether Exxon Mobil (XOM), which has gained a whopping 43% this year, and Chevron (CVX), which is up by about 23%.

Looking for a balanced portfolio to invest in? Here’s a high-quality portfolio to beat the market, with over 150% return since 2016, versus 85% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

  1. 10-Year Breakeven Inflation Rate, St. Louis Fed []