Warren Buffet was right - We need to be worried about inflation: Here are two stocks to help you fight it!Oct 28, 2021
Every May, Warren Buffet hosts the annual Berkshire Hathaway shareholders meeting. It is one of the premier events of the year. As investors this is a can't miss event!
While the actual event is 5 hours long, we broke down the TLDR on what you needed to know in an earlier post this year. Fast forward to today and these points are now as relevant as ever!
The key takeaways at the time are below. See how they haven't changed much, and our advice continues to hold true today!
- Warren Buffet thought inflation was not being taken seriously enough and that we should be much more worried about it. Fast forward to today and the man has been nothing short of right. Even today with inflation picking up, and people shouting about the issues to come, it still doesn't seem to be resonating with the government or the market. The S&P is close to all time high's and the FED is talking about raising interest rates. At some point this needs to break and should inflation keep rising, on the heels of a supply shortage, and we're looking at a possibility of entering into a period of hyperinflation.
- Warren Buffet said that he was seeing substantial increases in prices across all of their subsidiaries and they have no choice but to accept the higher prices as it's become uniform. Similar to our latest point, this hasn't changed. Some businesses have either been able to adapt to the changes and others have just gone out of business. A large portion of these businesses have tried to pass on the higher costs to consumers as well. This will eventually reach a tipping point where businesses either can't afford to pay up to fund their operations or consumers won't be willing to pay for the increased costs.
- Back in May, within their home building division (Clayton Homes), they saw new home building costs rise substantially. A large part of this was due to framing as framing is 20% of a home’s costs. With lumber up so much, there was no choice but for new home construction costs to rise drastically. Fast forward to today and lumber is down since May but is still up over 20% since last year. With lumber costs expected to continue rising, new home starts will be more expensive to build, thus pushing home prices up!
- Looking across other commodities, Warren saw steel costs rising as well - with prices even rising daily! In one year alone there was a 54% increase in the price of steel. Since 2016 its up over 300%. While it has been coming down since May, the spikes in steel pricing could easily lead to another surge upwards.
With the world changing so much every single week, it is very alarming that his concerns back in May are still present today.
But as we mentioned before, the economy is red hot along with the market rising, and it is setting up for many investors to be fearful. The demand for some products is so high and the backlog is so high, that we still haven't seen reasonable point where this can start to level off.
And until supply can catch back up, he thought inflation would keep rising. And guess what? He's been right.
It's not a price sensitive economy right now even with inflation but the scarcity of raw materials for products is real and he/we believe it can be very dangerous.
Why is it dangerous?
The problem lies in the fact that if people think this will continue going up, they'll continue to ride the train out. For example if home prices only go up people will go out and buy homes now because they believe once they buy it, the appreciation of their home will cover the cost of them "overpaying" for it. If this continues to happen in perpetuity, thereby driving prices up and up every single week, eventually with such a big rise, a fall is inevitable.
And a tank in the housing market, would have reverberations throughout the stock market as people’s primary wealth is tied up here. This event would lead to something called: hyperinflation - which people think the US is immune to.
While Moby and Buffet do not believe this will happen, the week over week price spikes haven't been trending favorably. Aside from any event of hyperinflation, if the economy is this red hot, an early interest rate hike will become more and more likely.
Should this event happen, there would likely be a massive pullback in the markets! With higher interest rates, comes lower valuations, lower ability for people to spend and overall slower economic output. The Fed is currently signaling for the end of 2023, but again should this trend continue, they may have to move faster than expected.
With a move like this, it's best to be armed ahead of time, rather than move too late.
So in order to hedge against this happening, we recommended three stocks that could protect you from hyperinflation and an early Fed move. (Note that they're all in the financials sector.)
Why? Because profit margins actually increase with any increase in interest rates. With a large portion of their income coming from loans, any increase in rates, leads to more profit per loan! Therefore these three stocks all derive most/all of their revenue from their loan based businesses.
Top 2 Interest Rate Sensitive Stocks:
1) SVB Financial Group (SIVB)
SIVB is up nicely since our recommendation in May and we're using this time to reiterate our overweight positioning on the stock. Analyst ratings across the street are generally positive and SIVB has seen deposits, revenues and loans increase given their large footprint in the venture community.
With many more deals to come across the space, we see SIVB as a nice alternative lender relative to the big banks. We believe they will help you hedge interest rate risk, as financials across the board have surged over the last year.
Our price target for SIVB is $898 and believe this should occur by Q2 2022!
2) Wells Fargo (WFC)
While Wells Fargo isn't the sexiest stock in the world, it quietly has been outperforming the market by a widen margin in 2021. Up 70% YTD vs. the market's 23%, Wells Fargo is delivering some serious upside coupled with some solid quarterly dividends.
As one of the largest lenders and depositors in the U.S., Wells Fargo has been able to enjoy increasing revenues on the heels of a large balance sheet.
Getting past their scandals of years past, Wells Fargo has grown their company to have over $1.9 trillion in assets, serving one in three U.S. households, and more than 10% of small businesses in the U.S.
We believe growth for Wells should continue and are therefore continuing to hold onto the stock.
Our price target for WFC is $60 and believe this should also occur by Q2 2022!
Closing out our Position:
3) LendingClub (LC)
Back when we originally recommended LC in May, the stock was trading near $12. Fast forward to today and the stock is up 166% since then! With the stock up so much, many of you have been asking us if we're still overweight the company.
The short answer is no and we are starting to trim back our position. While we do still like the company over the long term, we are using this moment to lock in our upside.
If you're a multi-year holder, we're recommending to continue holding on, but with a 500% rise YoY, it's hard to not to take some profits off of the table.