Author Topic: Best stocks/sectors for higher inflation  (Read 3000 times)

IanBezek

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Best stocks/sectors for higher inflation
« on: February 05, 2019, 04:23:25 PM »
I've been thinking a lot about how to protect my portfolio for more inflation in coming years. Obviously the great inflation that Fed critics expected after 2008 never happened. That said, political developments now - particularly mainstream political acceptance of MMT makes it seem more likely that the Fed/treasury will monetize some debt in the future. I don't care whether or not MMT is sound policy or ethical for the sake of this conversation, let's just consider the possibility that the government decides that, say, a 5 or 7% inflation rate is more correct and amps up money creation - taking seigniorage along the way - to get it.

I know the popular thinking on inflation is to buy gold, resource stocks, oil, etc. but historically these seem to be pretty awful investments outside of inflationary periods making them, on the whole, rather lousy investments. If inflation remains low, I don't want to own garbage merely as a portfolio hedge.

As such, what equities can we own in attractive businesses that hedge against higher inflation? My preliminary thinking is:

Highly levered companies - their debt obligation shrinks quickly in real dollars.
Companies that need very little capex - I'm thinking consumer staples plays like Hershey, McCormick. Diageo that can raise prices in line with higher inflation and their brands appreciate in value to keep up with inflation.
Some types of REITs
SAAS companies and other tech plays with free cash flow.
Emerging market levered-growth companies that should enjoy a boom as easy dollars float around the world

Your thoughts?


Spekulatius

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Re: Best stocks/sectors for higher inflation
« Reply #1 on: February 05, 2019, 07:04:34 PM »
Real estate and highly leveraged companies might have trouble, if interest rates rise with inflation. I would imagine that this means that cap rate would go up and real estate might get cheaper.

The best business will be those they donít need to reinvest much, but have pricing power. Food /consumer staples used to be they way, but I am not sure any more - they have lost a lot of pricing power in three last few years. It also depends on where the inflation pressure comes from - commodities, energy, wages?  I would think they tech/growth companies would do Ok, or perhaps something like Dunkin Donuts, Starbucks etc.
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scorpioncapital

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Re: Best stocks/sectors for higher inflation
« Reply #2 on: February 06, 2019, 04:07:20 AM »
i've seen a paper showing real estate does better than straight up commodities or gold during an inflation. However it was pretty darn close to run of the mill bonds at the then-to-be interest rate. What was not in the paper was that quality well picked stocks should in theory do better if they have low capital intensity and growth rates (like tech). But high inflation also changes the discount rate, so high growth tech companies that haven't made money in a while, I'm not sure what the market would make of this...

Capital intense businesses can work if you made a huge investment now or last few years, before the unexpected inflation hits and then you're sort of in a run-off intensity scenario. It seems to be a dynamic process. If such a capital intensive business can get 10 years out of their investment and the inflation spikes, peaks, then drops after 10 years, well that may not be so bad.

I am weary of debt ladden companies. Yes their debt becomes smaller in relative terms but their costs go up, cutting into their profits. If they were a poor business that needed the low cost leverage, then it will cut into cash flow and valuations. Insurance companies I think could be alright if run well as their cost of funding/float could be much lower than the cost of borrowing. It's all about the tipping point. Another chart shows that moderately higher inflation and rates could increase market valuations from here but past a certain point it goes the other direction.

People think the fed controls interest rates...but what happens if buyers of treasury bonds disappear? how will the fed control the spike in rates to sell 1 trillion a year of debt, and refinance over 20 trillion of existing debt?


SHDL

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Re: Best stocks/sectors for higher inflation
« Reply #3 on: February 06, 2019, 01:55:50 PM »
Like Spekulatius noted, interest rates tend to go up in inflationary environments so high debt is not necessarily a good thing.  Basically, old debt can get inflated away, which is good, but at the same time the cost of new debt usually goes up with interest rates, which is bad.  So for example youíre in pretty good shape if youíve already borrowed all the money youíll ever need to borrow by selling a bunch of 50 year bonds, but you will not do as well if your debt mostly consists of adjustable rate loans or you need to borrow more or refinance your existing debt in a few years.  If you can get yourself something like a 30 year fixed rate mortgage (before interest rates go up, of course), that can be a very nice way to benefit from this.

In terms of sectors/stocks, I would also check out the major credit card networks (like V and MA) and cable cos (like CHTR and others).  Those guys can basically keep milking something theyíve already built and are unlikely to have much difficulty raising prices with inflation.  DIS is probably worth looking into as well, partly because itís an IP-based company with similar characteristics but also because (as I understand) ESPNís contracts with sports leagues are set in nominal terms and can therefore be inflated away.

bizaro86

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Re: Best stocks/sectors for higher inflation
« Reply #4 on: February 06, 2019, 04:05:06 PM »
I think DIS is potentially a great inflation hedge. They'll have a decent debt load (after FOX closes) that could be inflated away, and it's much higher if you consider future fixed payments to sports leagues as debt.

They also have significant capital assets with very long lives (theme parks) that have huge pricing power. If inflation went to 10% per year I think the cost of Disney park tickets goes up 14% per year and the capital base used to build the park starts becoming inconsequential compared to the revenue stream in nominal dollars.

Their non-fixed assets (back catalogue, IP) probably also inflate and don't really require maintenance capex.

Gregmal

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Re: Best stocks/sectors for higher inflation
« Reply #5 on: February 06, 2019, 04:41:15 PM »
MSG

Ticket prices always go up. Yes even during the GFC.

KJP

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Re: Best stocks/sectors for higher inflation
« Reply #6 on: February 06, 2019, 05:50:10 PM »
MSG

Ticket prices always go up. Yes even during the GFC.

You know you have a good business when you can put out a garbage product like the typical Knicks roster over the last decade and still raise prices every year.  But even Knicks fans apparently have limits.  Their attendance is finally down to 16th in the league this year.  I have no doubt it would be top-five again with a decent team.

Gregmal

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Re: Best stocks/sectors for higher inflation
« Reply #7 on: February 06, 2019, 06:02:20 PM »
MSG

Ticket prices always go up. Yes even during the GFC.

You know you have a good business when you can put out a garbage product like the typical Knicks roster over the last decade and still raise prices every year.  But even Knicks fans apparently have limits.  Their attendance is finally down to 16th in the league this year.  I have no doubt it would be top-five again with a decent team.

Yea I'm a lifelong NJ Devils fan. So I've noticed what goes on across the Hudson and at the same time been envious of their obvious advantages. What I've also seen is that even with what they tend to report as "poor attendance", they still sold all of their tickets for the event. Something the Devils, as well as most other teams can only dream of. The corporate sponsorship/subsidization as I refer to it, is insane, and keeps prices high.

NewbieD

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Re: Best stocks/sectors for higher inflation
« Reply #8 on: February 08, 2019, 04:12:29 AM »
Pricing power, float and negative duration gap would be things to look for.

Betting companies that have float in form of customer deposits and addictive properties that gives relatively stable demand. Tobacco companies that have little debt or at least long debt. Agree with McDonalds, Starbucks above. Disney sounds interesting, thanks for the idea.

What you don't want to hold is permanent debt like preferred shares. But if you can find something that is financed using callable preferreds that should be good since you can buy them back cheaply during an interest rate surge.

Insurance companies that have a short duration investment portfolio and long liabilities that are fixed in nominal terms would do well since the liabilities are more heavily discounted. E.g. Storebrand.

scorpioncapital

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Re: Best stocks/sectors for higher inflation
« Reply #9 on: February 09, 2019, 01:58:08 AM »

Insurance companies that have a short duration investment portfolio and long liabilities that are fixed in nominal terms would do well since the liabilities are more heavily discounted. E.g. Storebrand.

what would you consider short duration? i've seen some companies hold 1 year, 2-3 year, and 5 year. I'm thinking 5 year is on the edge, although given the last 5 years and currently it seems a potential sweet spot.