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6 Stocks to Buy as Rate Hike Stokes Inflation Fears

Swarup Gupta
In such a situation, investing in gold and oil stocks would prove to be a most profitable option.

Major benchmarks closed in the red on Wednesday with the S&P 500 snapping its six day stretch of gains. Such losses came about even as the yield for the benchmark 10-year U.S. Treasury Note moved higher. A section of market watchers attributed these losses to profit taking, but others believe that they were a fallout of investor wariness over an upcoming increase in inflation.

Differing opinions exist about the prospects of U.S. inflation during the current year. But a large swathe of market watchers is switching around to the view that an increase in inflation is indeed forthcoming. In such a situation, investing in gold and oil stocks would prove to be a most profitable option.  

U.S. Treasury Yields Hit 10-Month High

On Wednesday, the yield on the 10-year U.S. Treasury Note exceeded 2.590% for a short period. Ultimately, the figure settled at 2.551%, the highest level recorded since March and a significant increase over Tuesday’s close of 2.542%.

A section of analysts attributed the increase in bond yields to reports that Chinese authorities were considering decelerating or altogether stopping the purchase of U.S. Treasury securities. Similar sentiments were expressed on Tuesday when the Bank of Japan announced that it was preparing to curtail bond purchases, leading to a spike in U.S. Treasury yields.

However, other experts indicated that the yield spike was likely a reaction to fears about an upcoming increase in inflation. This could lead to a series of rate hikes from central banks which could end up halting the equity market rally.
 
Inflationary Pressures Boost Demand for TIPS
 
A variety of factors are building up inflationary pressures at the moment. And these pressures are being reflected in the rise in demand for Treasury Inflation Protected Securities (TIPS). During the week ended Jan 3, TIPS experienced an inflow of $465.5 million, taking their total assets to an all-time high of $67.4 billion, per data from Lipper.

U.S. inflation has remained shy of its 2% targeted level for some time now. But the recent increase in commodity prices and the pickup in the global economy are setting the stage for a likely rise in inflation. The recently enacted Tax Cuts and Jobs Act of 2017 is another factor supporting an increase in prices, since it is likely to provide a major short term fillip to hiring and investment.
 
Additionally, the U.S. labor market continues to be in fine fettle even as wage increases remain slow yet steady. Further, the continuing weakness in the U.S. dollar is likely to boost the prices of products made abroad. And finally the economy continues to be resilient, creating an atmosphere conducive to a prospective rise in prices.

Our Choices

The recent rise in U.S. Treasury yields is a clear result of apprehensions surrounding an upcoming inflationary spike. Recent tax cuts, weakness in the dollar and the inherent strength in the labor markets are the major factors creating such pressures.

A strong global economy and burgeoning commodity prices are other factors supporting an increase in prices. On Wednesday, gold hit a four-month high following weakness in the U.S. dollar. Meanwhile, oil prices continue to trade at levels not witnessed since December 2014.

Investing in gold and oil stocks to combat upcoming inflationary pressures looks like a prudent option at this point. However, picking winning stocks may be difficult.
 
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
 
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Golden Star Resources Ltd. GSS is an un-hedged gold producer that owns the Wassa gold project in Ghana and controls a number of gold exploration properties in West Africa.

Golden Star Resources has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 56.8% for the current year The Zacks Consensus Estimate for the current year has improved by 10% over the last 60 days.

IAMGOLD Corp. IAG is an international gold exploration and mining company based in Canada.

IAMGOLD has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 0.6% over the last 30 days.

Global Partners LP GLP owns, controls or has access to one of the largest terminal networks of refined petroleum products in New England.

Global Partners has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 14.4% over the last 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CVR Refining, LP CVRR is engaged in the refining of petroleum primarily in the United States.

CVR Refining has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 20.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 36.6% over the last 30 days.

Kirkland Lake Gold Ltd. KL engages in the provision of mining and mineral exploration, focusing on gold assets.

Kirkland Lake Gold has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 69.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.5% over the last 60 days.

CrossAmerica Partners LP CAPL engages in the wholesale distribution of motor fuels, consisting of gasoline and diesel fuel, and owns and leases real estate used in the retail distribution of motor fuels.

CrossAmerica Partners has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by more than 100% over the last 60 days.

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