Inflation, interest rate hikes, and a potential looming recession. These are terms that no investor is ever keen to hear. Yet these are some of the buzzwords that have been dominating investor discourse throughout the financial markets. With oil prices ready to see a further climb in the coming weeks, inflation is likely to reach unprecedented levels and it is really getting difficult for investors to find the best inflation stocks. There is pessimism and uncertainty, and the question on everyone’s minds is ‘What can I do to hedge my portfolio against such high inflation?’
Despite such a bleak outlook, however, there is opportunity in adversity. The good news for investors is that their portfolios can effectively see hedging against high inflation with proper planning. A robust portfolio during such conditions would typically include stocks of companies that do not see their income being chipped away, as a result of the broader economic disruptions, and is able to maintain a minimum growth that is above prevalent inflation rates.
In this article, we shed light upon the best inflation stocks to consider parking your funds in. We believe these will help you sail through this sea of economic uncertainty. We present to you a list of the top five stocks that are ideal to be held during periods of high inflation.
Johnson and Johnson
Johnson and Johnson (NYSE: JNJ) has historically gained a reputation as a go-to stock for investors, during rocky economic conditions. In the last six months alone, when S&P 500 fell by nearly 8% in the panic-induced mass selloff, JNJ actually climbed by almost 14%.
JNJ’s stellar balance sheet is a core factor that delivers confidence to its shareholders. It is only one of two American companies to hold a triple-A rating, which is higher than that of the US government itself.
The company is a clear leader in the various market segments it occupies and has been reporting surging revenue growth, which had seen a spectacular acceleration since 2020. Moreover, healthcare demand is largely inelastic to price changes, given the critical nature of healthcare.
The stock’s status as being a dividend king further adds to the reasons why it’s one of the best options to consider during this inflation. Not only does the stock allow your capital to appreciate amidst rising costs, but also effectively offsets the purchasing power decrease through timely dividend payments. These features collectively make JNJ the best inflation stocks given the present climate.
Exxon Mobil Corporation
Next up is Exxon Mobil Corporation (NYSE: XOM), the American energy giant. With the S&P 500 falling by 8% in the last six months, XOM rose by a staggering 60% and absolutely crushed the performance of the wider equities market, in a comparative sense.
As we continue to see a rise in oil, coal, and gas prices, investors are rightfully turning to the energy industry. There is the anticipation of an increase in its profit margins, given these conditions. Given this potential to extract gains from an inflationary environment, there probably is no better energy stock one can opt for than Exxon Mobil.
The primary reason we believe you cannot go wrong with Exxon Mobil is its robust and diversified asset portfolio, which enables it to drive down prices by a significant margin. In just its recent quarter, the company’s discoveries in the South American coasts of Guyana pushed up its resource capacity in the region to nearly 11 billion barrels. Moreover, Exxon Mobil’s significantly large scale of operations allows it to deliver unmatched earning efficiency. This further drives down its direct costs. In the first quarter of 2022, the company delivered structural savings of nearly $6 billion, which it sees rising to $9 billion by the end of 2023. The ability to drive down costs amidst a rising commodity price environment can only mean greater profitability for its shareholders.
XOM’s dividend payments further make the stock a strong investment candidate to consider during periods of inflation. The stock’s dividend yield stood at an impressive 4%, at its recent payout making it the best inflation stocks. In addition to its consistently growing dividend payments, Exxon Mobil had further committed $30 billion to a buyback program. This further indicates the strength of its balance sheet.
Moving on, we look at the American Real Estate Investment Trust, Boston Properties (NYSE: BXP), which is presently the largest publicly traded owner, manager, and developer of Class A office properties. In comparison to the 8% dip of the S&P 500 in the last six months, BXP managed to bring in a 3% gain.
During times of inflation, investors typically perceive the real estate sector as a means for inflation-proofing their portfolios. This assumption is based on the anticipation of rental income to rise alongside other input costs.
In the case of a REIT such as BXP, this optimistic anticipation stands ever true. The company holds a robust portfolio of over 200 properties, that total nearly 53 million square feet. By focusing across the most high-quality office zones, it boasts some of the most impressive tenants. These include Microsoft, Google, Biogen, Salesforce, and various agencies of the United States government.
Boston Properties’ management focuses on a strategy that targets ‘gateway regions’, which possess long-term rent appreciation potential. This enables it to achieve more optimal diversification.
In the Real Estate domain, there’s hardly a better option than BXP for investors to park their capital in. This is especially true during these rising inflationary tides.
The fourth stock of our inflation hedging stocks is Aluminum giant, Alcoa Corporation (NYSE: AA), which saw its year-on-year EPS ballooning by almost up to 4 times in its latest earnings release in April 2022. Moreover, AA had experienced a 43% climb in the last six months, as compared to the 8% dip of the S&P 500.
For a commodity stock such as Alcoa, the profitability margins growth that inflation brings is apparent. This can be gauged from the price it has charged in early 2020, compared to the first quarter of 2022. During this period, the company’s price for Aluminum charged has more than doubled. It presently stands on the verge of $4000 per metric ton.
Inflation presents a pretty strong growth opportunity for AA, which is sensitive to the movements of global aluminum prices. Moreover, aluminum finds heavy use in the manufacture of electric vehicles, which is another rising trend observed in recent years. Alcoa is optimally positioned to turn big profits in this context. This is due to it being one of the largest Aluminum-producers in the world. Shareholders would hardly find a better-suited growth stock than AA if they are looking for the best inflation stocks. This is because it would allow their portfolios to soar high in this inflation environment.
Barrick Gold Corporation
Last on our list, but far from being the least is the Canadian gold stock, Barrick Gold Corporation (GOLD).
Seldom does one think of an inflation strategy, and not consider the gold industry. This is due to its reputation of being a great store of value amidst rising commodity prices. The broader market traditionally perceives gold as being the ultimate hedge against inflation. For this reason, whenever financial uncertainty looms across the economy, the demand for gold surges. Perhaps this explains Barrick Gold’s recent growth trajectory.
In the last six months, the company had outperformed the S&P 500 index, boasting a price gain of almost 11%. Considering that the index had dipped by 8% during this time, Barrick’s investors have thrived. This has been the case despite other stocks seeing their capital come crashing down.
Moreover, we are confident that the company is potentially standing on the verge of immense opportunity. This seems to be the case after another successful round of drilling at the Donlin Gold property in Alaska. Following strong feasibility results, which point to a longer mine lifecycle, Barrick has gone all in. It does this by enhancing its spending, with its partner NovaGold, to levels unseen in the last ten years. These findings are remarkably based on only a 5% exploration of the company’s total land claims. This ups the present value of the stock’s growth potential to a substantial degree and thus placing it on the list of best inflation stocks. If these opportunities are realized, we could be seeing the gap between its stock movement, and that of the S&P 500, further widen.
Inflation understandably rings alarm bells across the financial market. This is because it poses the risk of profit slowdown, reduced demand, and higher costs to maintain operations. However, certain investors in the market use these conditions to see their portfolios climb extraordinarily high. This is in line with the widely accepted view that there indeed is opportunity in these adverse circumstances.