Cost of living for Americans rose last month at the fastest pace in six years, indicating a strong U.S. economy and tighter labor market. An uptick in gas prices and higher rent pushed up U.S. inflation, taking a bite out of household income and putting consumers under pressure.
In such an inflationary environment, investors should buy real estate and gold which increase in value at a rate in excess of the rate of inflation.
Consumer Inflation Fastest in 6 Years
U.S. consumer prices rose at the fastest pace in May in six years, compared with the same period in 2017, according to the Labor Department. In the 12-month period through May, the Consumer Price Index (CPI) was up 2.8%, its biggest year-on-year gain since early 2012. The core CPI measure that excludes volatile food and fuel costs rose 2.2% from last May.
Increase in cost of gasoline, medical care, rent and home prices led to an uptick in the cost of living last month. Solid demand, reduction in OPEC’s production levels and geopolitical issues propelled gas prices higher. The cost of medical care, by the way, rose following a slowdown toward the end of last year. Same can be easily said about rents and home prices.
Even though the cost of new cars, airfares and communication services has dropped, it hasn’t been able to offset the broader rise in prices of essential commodities. This rise in inflation has adversely affected household income. Inflation-adjusted hourly wage went up a meagre 0.1% last month and has remained unchanged on a year-on-year basis.
PCE Shows Heated Up Inflation
The Fed’s preferred gauge of inflation, known as the personal consumption expenditures price index (PCE), has already touched the central bank’s 2% target during March and April. The figure is now slightly below the Labor Department’s CPI.
The Fed funds rate is expected to tick up 25 basis points at the conclusion of its June 12-13 FOMC meeting, with another hike or two anticipated this year. The possibility is backed by the rise in headline inflation (read more: June Rate Hike Almost a Done Deal: Top 5 Winners).
How to Profit From Inflation?
Real estate is an obvious choice because a rise in prices increases the resale value of the property over time. Further, as the value of the property rises with inflation, the amount tenants pay in rent can be increased over time. This is how income generated from a real estate property can keep pace with the general rise in prices across the economy. A real estate property is purchased with the intention of earning a return on investment either through rental income or through future resale of the property.
When inflation is high, the value of paper currency tanks in terms of goods and services it can buy. But rising inflation is good for gold prices, as gold doesn’t lose value like currency in times of higher inflation. In fact, as inflation increases, demand for gold moves north. Silver and other metals also tend to gain value during inflationary times. However, gold is generally the headline-grabbing investment.
5 Top Picks
As inflation heats up, investing in the aforesaid areas will be judicious. Real estate can be purchased indirectly through investment in real estate investment trust (REIT), while gold can be purchased by investing in stocks of a company involved in the gold mining business.
We have, thus, selected five stocks that boast a Zacks Rank #2 (Buy) and belong to the real estate and gold space. Both the group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.
The Zacks REIT and Equity Trust industry currently is at the top 23% of more than 250 Zacks industries, while the Zacks Mining - Gold industry is presently at the top 43%. Our research shows that the top 50% of the Zacks-ranked industries outdo the bottom 50% by a factor of more than 2 to 1.
Industry: REIT and Equity Trust
MFA Financial, Inc. MFA operates as a REIT in the United States. The Zacks Consensus Estimate for its current-year earnings rose 7.9% in the last 60 days. The stock’s expected earnings growth rate for the current year is 3.8% versus the industry’s estimated rally of 0.2%.
Colony NorthStar, Inc. CLNS is a leading global real estate and investment management firm. The Zacks Consensus Estimate for its current-year earnings rose 1.4% in the last 60 days. The stock’s expected earnings growth rate for the current quarter is 142.9% versus the industry’s projected growth of 42.5%.
Redwood Trust, Inc. RWT qualifies as a REIT for federal income tax purposes. The Zacks Consensus Estimate for its current-year earnings rose 16.7% in the last 60 days. The stock’s expected earnings growth rate for the current year is 20.9% versus the industry’s estimated rally of 0.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sutherland Asset Management Corporation SLD operates as a real estate finance company and qualifies as a REIT for federal income tax purposes. The Zacks Consensus Estimate for its current-year earnings rose 4.5% in the last 60 days. The stock’s expected earnings growth rate for the current year is 14.1% versus the industry’s estimated rally of 0.2%.
Industry: Mining – Gold
Alio Gold Inc.’sALO engages in the acquisition, exploration, development, and operation of mineral resource properties including gold. Its principal assets include a 100% owned and operating San Francisco open-pit. The Zacks Consensus Estimate for its current-year earnings rose 6.9% in the last 60 days. The stock’s expected earnings growth rate for the current year is 3.3%, while it is anticipated to do even better next year, up 22.6%.
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