With a 5.4% year-over-year increase in the consumer price index in September, we have real-time evidence of inflation smack-dab in front of us.
Inflation in the United States is now running at its hottest pace in 30 years.
Even Federal Reserve Chairman Jerome Powell is finally admitting that he finds current inflation pressures “frustrating.” Powell now believes that these pressures will continue into 2022.
That’s quite a reversal from Powell.
His go-to talking point for months had been that the inflation uptick was “transitory” and nothing to worry about.
It is starting to look like he was wrong.
I’m here to tell you that inflation is something to worry about.
There’s a very good chance that we are now embarking on a sustained run of inflation that we haven’t had in decades.
As Warren Buffett explained in his famous 1977 Fortune magazine article, inflation really does “swindle” the equity investor.
Therefore, as investors, we can’t just stick our heads in the sand and pray that inflation is not going to become a problem.
I say rather than suffer from inflation, let’s exploit it!
These Stocks Shouldn’t Be This Cheap
It is such a strange time in the financial markets.
We have had an incredibly long stretch of historically low interest rates, and central banks have flooded the market with liquidity.
There is no question that we’ve found the perfect recipe for massive inflation.
And as we have seen, inflation is already running hot.
In theory, stocks that offer protection against inflation should not be trading at attractive valuations today.
But that isn’t the case…
Shares of commodity producers of all kinds are trading at attractive valuations.
In many cases, the free cash flow yields on these stocks are in the teens – sometimes even higher.
Cenovus Energy (NYSE: CVE), which I recently wrote about, offers investors an eye-popping 27% free cash flow yield.
The chart below shows that the price-to-earnings ratio that global metals and mining stocks are trading at is the biggest discount to the rest of the market in recent memory.
The raw data shows that these stocks are cheap at current commodity prices.
But if we go into a period of sustained inflation, commodity prices will go higher and so will the cash flows and earnings of these producers.
If commodity prices go higher, that means these stocks will be even cheaper than they appear.
Plus, there is more than just monetary policy that makes me think commodity prices are heading higher.
Back in February, I noted how both commodity guru Jeff Currie of Goldman Sachs and hedge fund legend Stan Druckenmiller were bullish on commodities.
Currie believes we are headed for a long-lasting bull market for commodities.
He believes that, in addition to central bank policy, the drivers of the market will be…
- A decade of massive underinvestment in new supply across virtually every commodity
- Hundreds of billions of dollars of upcoming government spending on commodity-intensive infrastructure needed to build out the global economy.
Put all of these factors together, and the bullish case for commodity producers is strong today.
These stocks should not be so cheap given the inflation protection that they offer.
But they are – so let’s take advantage of it!
I’ll be back with more ways to do so in the near future.
Good investing,
Jody