Worried About Inflation? Here's 5 Stocks to Protect Your PortfolioApr 02, 2021
At Moby, we have been focused on the impact that worldwide government currency printing will have on investors and the markets.
We continue to see increasing signs that we may be moving toward an inflationary environment due to the actions of central banks, and government administrations all over the world. Global government responses to both the 2008 financial crisis and the current economic disruption have been unprecedented both in scale and scope. In the US, for example, the Federal Reserve Bank has injected money into the US economy at a never before seen rate as part of an effort to combat the adverse effects that the pandemic has had on businesses and individuals. In addition, President Biden is also announcing plans to inject an additional multi trillion dollar stimulus as part of his proposed infrastructure bill.
We believe as investors, inflation is an important risk to consider, and hedge against with some allocation of your portfolio.
Historically, many investors have added exposure to CPI-linked assets such as TIPS (Treasury Inflation Protected Securities), LIBOR based loans and real estate/listed infrastructure equities. While we think these vehicles may keep pace with inflation, we believe there is a better way to actually benefit and profit from inflation.
We look towards investing in stocks of businesses that directly benefit from rising real-asset prices. Specifically, we’re targeting businesses that provide exposure to hard assets, such as precious metals, energy, base metals, agriculture and real estate, but don’t have high fixed costs or operational risks. These companies facilitate high operating leverage during strong asset price cycles, which is what we’re trying to hedge against.
- For example, if oil prices go up, oil companies can charge more for oil. However, their costs also usually go up, because in an inflationary environment - the price of everything goes up. So, that oil company can charge more for the oil it sells, but in many ways it is a zero-sum game, because their operating costs (price of equipment, wages to staff, etc), also increase.
Some additional examples of characteristics we look for in inflation beneficiary stocks include:
- Pricing power (companies that profit from unique products that their customers cannot easily acquire on the open market).
- Exposure to real assets (energy, precious metals, land)
- Undiscovered assets (much like the real assets noted above, but assets that have not yet been monetized)
- "Asset-light" businesses that have low operating costs and act as pass through vehicles.
Examples include royalty companies, information-based companies such as contract research organizations, defense technology contractors, and market data companies, all of which enjoy strong pricing power and relatively low fixed costs.
There are many ways to hedge a potentially inflationary environment, but here are a few investments we believe will benefit from inflation.
Intercontinental Exchange (ICE): One asset-light example today is ICE, founded 20 years ago as a digital exchange trading Brent crude-oil futures and now a global powerhouse in the financial exchange, clearing and data industry. It owns the New York Stock Exchange and also has leading and unassailable market-making positions in financial derivatives, fixed income, energy, agricultural products and metals. It has proven adept in capitalizing on analog-to-digital shifts in all manner of trading markets, while also repackaging and selling its vast stores of data. Operating margins exceed 50% and earnings per share have grown at a 17% annual clip over the past 15 years.
Texas Pacific Land Trust (TPL): Currently our top pick for 2021. TPL is the largest private landowner in the state of Texas, and owns over 900,000 acres of land across 20 Texas counties throughout the Permian Basin. TPL generates its revenue by charging royalties on the oil and gas output that its customers derive from its land. Going back to the above characteristics, TPL has a tremendous exposure to a very sought after real asset (land on which companies can drill for oil).
PrairieSky Royalty Ltd. (PREKF): is a pure-play royalty company, generating royalty revenues as petroleum and natural gas are produced from their 16.2 million acres of royalty properties spanning Western Canada from Northeast British Columbia to Western Manitoba. PREKF has the largest independently owned portfolio of mineral title and oil and gas royalty interests in Canada.
Franco Nevada Corp (FNV): Franco-Nevada is a Canadian gold-focused royalty and streaming company, although it acquires royalties in other commodities as well, including silver, copper, oil and gas. It does not operate mines itself, but rather, collects royalties from mining companies or purchases future gold production at pre-arranged prices, in exchange for providing investment capital. The company is the beneficiary when its investees increase production, as well as when gold prices rise. However, it is not directly impacted by cost inflation, as the expenses are borne by the operators, not directly by Franco-Nevada. Similarly, the company is not encumbered with risks that are normally faced by mining companies, such as increased personnel costs, exploration and development expense, and mine reclamation or remediation.
Horizon Kinetics Inflation Beneficiaries ETF (INFL): INFL is a unique fund that offers investors exposure to stocks that are “capital-light”, and will benefit from inflation. INFL holds roughly 35 unique stocks and is an actively managed fund. These stocks do not need inflation to occur to be successful, as the fund managers believe they are well run companies in normal periods of inflation. However, the INFL fund managers believe that these stocks will benefit if inflation does occur.