Surging Prices Bode Well For These Stocks

Inflation, which has been surging in recent months, is poised to rise further as the ongoing war between Russia and Ukraine causes a sharp increase in commodity and energy prices. For perspective, U.S. benchmark crude prices have risen over 30% over the last month to about $120 per barrel, while wheat prices are up by almost 60% over the last month. While the U.S. consumer price index (CPI) rose 7.5% for January 2022, the most recent reported month, February numbers, which are due this Thursday, are likely to be still higher, with economists projecting 7.8% year-over-year growth, per Dow Jones. It’s likely that CPI inflation could rise further in March as the full impact of the war, which began in late February, is seen.

Now the broader stock markets have fared badly this year, considering surging inflation, the ongoing war, and the prospect of multiple interest rate hikes by the Federal Reserve. The S&P 500 is down by over 9%, the Nasdaq-100 is down by about 16%, and high-growth, high-multiple sectors such as software and technology have seen even larger corrections. However, our theme of Inflation Stocks – which includes companies from the banking, insurance, consumer staples, and energy sector – has outperformed meaningfully this year, rising by about 9% year-to-date.  We think this theme could continue to outperform in the near term as well, for a couple of reasons. Firstly, with the Federal Reserve planning multiple rate hikes this year, banking and insurance stocks in the theme could potentially see stronger interest income. Consumer staples stocks should be in a better position to pass on higher input costs to customers, potentially holding steady compared to the broader market, while energy stocks stand to gain from rising oil and gas prices. Moreover, the stocks in the theme are also mostly value picks from real economy sectors, which should benefit as investors reduce exposure to growth stocks. For example, the average price to sales ratio of the stocks in our theme stands at just about 2.4x.

Within our theme, Exxon Mobil stock (NYSE: XOM) has been the strongest performer, rising by 32% year-to-date in 2022. On the other side, Procter & Gamble stock (NYSE: PG) has been the weakest performer, with its stock down by about 5% thus far in 2022.

Here you’ll find our previous coverage of the inflation stocks theme, where you can track our view over time.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 3/6/2022
[2] Cumulative total returns since the end of 2016