Inflation has been a concern for central banks in several parts of the world. The Federal Reserve is likely to pursue multiple rate hikes in 2022 to curb inflation. There are several reasons for the current wave of inflationary pressure. While there are concerns, the markets offer stocks to buy to benefit from any scenario. Even during inflationary times, certain stocks tend to out-perform.
First, it’s important to discuss the reasons for inflation. One factor is supply-chain issues globally due to the pandemic. This challenge is likely to ease in the coming months. Another reason is inflation being a monetary phenomenon. Even if there are four rate hikes in 2022, real interest rates will remain negative. This will continue to boost prices of hard assets.
Recent data indicates that commodity prices have continued to rally. Geo-political tensions have supported the upside in commodities. Given the scenario, it makes sense to consider exposure to some commodity stocks.
To some extent, inflation is transitionary. However, selected commodities will continue to trend higher base on the demand-supply scenario. This column will discuss four stocks to buy to benefit from commodity price inflation.
Freeport-McMoRan Inc. (NYSE:FCX)
Chevron Corporation (NYSE:CVX)
Newmont Corporation (NYSE:NEM)
Rio Tinto Group (NYSE:RIO)
Stocks to Buy to Benefit From Commodity Price Inflation: Freeport-McMoRan (FCX)
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Freeport-McMoRan is among the top names to buy to benefit from commodity price inflation. As a major producer of copper, Freeport is likely to benefit in the next few years. Even after a meaningful rally in the last 24-months, FCX stock still trades at a forward price-to-earnings-ratio of 11.8.
In terms of fundamentals, there are two important factors that will support upside in copper price. First, with investments following the U.S. infrastructure bill, analysts predict that copper price will continue to trend higher.
Additionally, copper demand for electric vehicles is expected to rise to 1.5 million tons by 2025. Demand is further expected to increase to 3.3 million tons by 2030. This is another segment that will push copper price higher.
Specific to Freeport, copper production in 2021 was 3.8 billion lbs. For the current and next year, production is expected to increase to 4.3 and 4.5 billion lbs respectively. Freeport therefore stands to benefit from higher copper price and rising production.
With strong fundamentals, the company is also positioned for aggressive growth beyond this period. For 2021, Freeport reported operating cash flow of $7.7 billion. OCF is likely to accelerate and help in investments and de-leveraging. The company’s net-debt has already declined to $1.4 billion as of Q4 2021.
Chevron Corporation (CVX)
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The energy sector tends to performs well in an inflationary environment. It’s not surprising that crude oil has been trending higher. Of course, there is gradual recovery in global demand for oil. Geopolitical tensions have also added to the upside in oil.
The current scenario therefore looks good for exposure to oil and gas stocks. CVX stock is one of the attractive names in the sector. A 4.26% dividend yield stock trading at an attractive forward P/E of 12.5 is one reason.
The company’s low break-even asset is another critical reason. The year 2020 was one of the worst for the energy sector. Even in that year, Chevron managed to deliver positive operating cash flows.
For 2021, Chevron reported operating cash flows of $29.2 billion. With oil trending higher, it’s likely that OCF will be robust even for 2022. This leaves ample scope for the company to pursue aggressive share repurchase and sustain dividends.
At the same time, Chevron has been investing in traditional as well as renewable assets. With a net-debt ratio of 15.6%, the company has the financial flexibility to maintain high level of investments. Chevron has a vast resource base, which ensures steady long-term cash flow visibility. It’s also worth noting that between 2016 and 2021, the company reported a reserve replacement ratio of 103%.
Overall, CVX is a quality stock to buy and hold for the medium-term and also for the long-term portfolio.
Stocks to Buy to Benefit From Commodity Price Inflation: Newmont Corporation (NEM)
Gold has historically been a hedge against inflation. Hard assets like gold and silver tend to out-perform as compared to fiat money in an inflationary scenario, as many investors in venerable Newmont Corporation understand.
It’s worth noting that the markets are discounting multiple rate hikes in 2022. However, gold has been relatively firm and above $1,800 an ounce. With geo-political tensions supporting gold at higher levels, it’s a good time to remain invested in gold mining stocks.
NEM stock would be among the top stocks to buy from the gold mining sector. With some renewed rally in gold, the stock is higher by 19% in the last six-months. However, there seems to be more upside potential for the 3.25% dividend yield stock.
In terms of fundamentals, Newmont has robust gold reserves of 94 million ounces. The project pipeline will help Newmont sustain the current production levels through 2040. This provides clear long-term cash flow visibility.
Another positive is the trend in all-in-sustaining-cost. Newmont expects the AISC to improve to $800 to $900 an ounce in the next few years. Even if gold is firm around current levels, the company is positioned for robust EBITDA and cash flows.
From a balance sheet perspective, the company reported cash and equivalents of $4.6 billion as of Q3 2021. Considering the undrawn credit facility, the company has a total liquidity buffer of $7.6 billion. With low leverage and swelling free cash flows, Newmont is well positioned to create shareholder value.
Rio Tinto (RIO)
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In general, commodity stocks have a relatively low price-to-earnings ratio because of the cyclical nature of the industry. Even after taking this into consideration, RIO stock looks very attractive at a forward P/E of 5.6. The stock also offers a robust dividend yield of 9.7%.
As an overview, Rio is involved in the exploration and production of diversified commodities. These include copper, iron ore, aluminium, lithium, titanium and boron. The most important factor is that most of these commodities have long-term positive tailwinds.
As an example, lithium demand will continue to surge as adoption of electric vehicles increases. Similarly, copper is critical for infrastructure and EV. Rio is therefore well positioned to benefit.
In earnings released this morning, consolidated sales revenue for 2021 was $63.5 billion, compared with $44.6 billion a year earlier. For 2022, the miner reaffirmed its production forecasts, including 320 Mt to 335 Mt of Pilbara iron ore and 500 kt to 575 kt of mined copper. Capital expenditures are projected to be around $8 billion, according to the company.
With a strong balance sheet, the company is positioned for investment and growth. Rio is also targeting increasing decarbonization target to 50% by 2030.
Overall, Rio Tinto has a robust business with diversified assets. The company has effectively used commodity price inflation to strengthen its balance sheet. With healthy cash flow, dividends are likely to sustain at current levels.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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