Inflation Shakeup Has Started – Time To Shift To New Stock Opportunities

Inflation is here, and consumers know it. However, many stock investors continue to look backwards, content to hold past winners and the now-top-heavy S&P 500 Stock Index. So, it’s the perfect time to buy inflation-based stock opportunities.

How long do we have? Likely, until the coming earnings report period is in high gear. While the 2021 fourth quarter and full calendar year results will be positive, expect management’s 2022 outlooks to be filled with inflation-based commentaries.

The earnings reports begin with the major banks on Friday, January 14. However, there is another round of important earnings reports beginning in February that will really bring inflation to the forefront: Retail companies (they typically have fiscal years that end on January 31.) They are in the challenging and potentially unrewarding middle – squeezed by supplier cost increases and aggressive competitor pricing (in the fight for market share).

So, where are the opportunities?

Importantly, there are more inflation risky stocks than there are opportunities. So, expect the limited opportunities to have the extraordinary characteristic of seemingly unlimited high prices, so long as inflation remains a growing concern. (In other words, do not sell when warnings of “overpriced and overvalued” get trumpeted.)

Gold – The classic, centuries-old protector of value. With all currencies being “fiat” (i.e., not backed by something of value), converting currency holdings to gold remains the most popular inflation hedge. (Silver and diamonds are lesser used alternatives)

Gold mining stocks – While owning gold protects purchasing power, owning gold mining stocks gains in two ways:

• First, increased asset value of the company-owned gold reserves
• Second, increased earnings and dividends from the mining and sale of gold as its price rises

Natural resource stocks – Similar to gold mining, natural resource (oil, natural gas, coal, timber) stockholders gain from the increased asset value of the companies’ holdings and from the earnings and dividends produced by the production and sale of the natural resources

Wall Street banking stocks – Currency exchange problems? Investment shakeups? Business challenges? Inflationary recession effects? Whatever the issues, Wall Street banks will be there, aiding businesses, governments, nonprofits and investors – and earning bucketsful of money.

Special situation stocks – Some individual companies can ride an inflationary wave and benefit from it. Here are four categories:

• A leading company in a fast-growing industry, where inflation’s effect is limited
• A company making inroads into an industry with stale competitors
• A company with a unique and/or superior product or service that allows it to increase prices without causing demand to fall
• A company with unusual conditions (e.g., just out of bankruptcy) that gives it a one-off opportunity for growth and earnings

Implementing the buying strategy

To carry out a shift to an inflationary strategy, here are three buying tips:

1. Don’t wait – Prices, values and yields are all attractive now, plus those management outlook commentaries about inflation are right around the corner
2. Diversify among the areas above (although owning gold outright is not necessary)
3. As to special situations, they can be hard to find – So, now is the time to invest in actively-managed (not index) mutual or closed-end funds (not exchange-traded funds) that search for and invest in such companies.

The bottom line: Opportunity strikes when conditions change, and the time is now

Even if you’ve read it before, remember these priceless words. They are at the heart of every successful investor’s superior returns:

A trend is a trend is a trend

But the question is, will it bend?

Will it alter its course

through some unforeseen force

and come to a premature end?

Alexander Cairncross

The tongue-in-cheek words chosen by Cairncross are “unforeseen” and “premature.” How many times have we read “nobody could have known” after some dramatic investment change? There are always investors who foresee the likelihood of something coming and then act before it becomes obvious to all. They are the ones who fulfill the obvious advice of “Buy low and sell high.”