What is stagflation? Stagflation occurs when inflation rises while economic growth slows. It’s essentially a worst-case scenario. We dealt with this back in the 70s and 80s when oil prices were skyrocketing. The S&P lost more than half its value. The combination of a slowing or weak economy and rising or above average inflation leads real rates (nominal rates minus inflation) to trend lower in a stagflationary environment.
Finch is going Stag. And so is the US economy.
I said it before, and I will say it again – we are going to enter a period of stagflation. Russia invading Ukraine only accelerated the return of the stag. Inflation is hitting some of its highest reported numbers in 4 decades and economic growth is expected to moderate this year, compared to 2021. GDP was 5.7% in 2021 and we are looking at half that this year. BOFA is predicting around 3.6% and Goldman is predicting around 3.2%.
Let’s find you some stocks that protect against stagflation.
1. Gold. This commodity rallied more than 20% in the 70s. Lower real rates make owning gold more attractive because there’s less of a carrying cost, so it offers better protection against inflation. Inflation and geopolitical risk create a bullish cocktail for gold. Over the past twelve months, gold began making higher lows, which effectively creates a wedge trading pattern. Last year, gold traded within the 2020 range, not making a higher high or a lower low. Traders believe that the narrowing trading range was a sign that a significant move was potentially on the horizon, and gold did not disappoint. In mid-February, the move above $1,879.50 broke the pattern of lower highs, and gold took off on the upside.
Take a look at some ETFs and individual names that I like.
GLD – Spider Gold Trust ETF
According to Andrew Hecht, author of the Hecht Commodity Report, “the SPDR Gold ETF product (GLD) is the most liquid gold ETF, with each share reflecting one-tenth of an ounce of gold. At the $190 level, GLD had $67.677 billion in assets under management. Nearly 17 million GLD shares change hands on average each day, and the ETF charges a 0.40% management fee.”
Those trading gold over the short run want to buy this fund purely for its liquidity.
Another gold ETF to consider is the iShares Gold Trust ETF (“IAU”).
What about individual Gold names?
I am selling Jaguar Mining Inc., a junior gold mining company, that operates gold producing properties in Brazil. Jaguar performed solidly in the second half of 2021. And gold production climbing for the three consecutive quarters and H2 2021 production was up more than 16% from H1 2021 levels. But Brazil has the fourth highest rate of inflation in the world and those prices will hurt margins – management has cited cost increases of 15% or more. Furthermore, production levels were recently revised to the downside. I had a nice little runup since the beginning of the year, but it is time to sell.
Jaguar Mining Inc. (“JAGGF”)
I am buying Gold Standard Ventures Corp (“GSV”). Gold Standard Ventures is an exploration stage company, engaging in the development of district-scale and other gold-bearing mineral resource properties in Nevada. Its flagship property is the Railroad-Pinion project covering an area of approximately 21,679 hectares located in the Elko County, Nevada.
Costs are low for this small-scale produce and development is relatively easy for the small flagship property. GSV offers an extremely attractive valuation with a Price to Book of 0.75. Book value per share is about $0.63. And the company has a tangible book value per share of around $225 million.
There is a good chance that this stock could be on a path to a 1.0X price to net asset value (NAV). The company is currently trading at roughly a 0.5x NAV. Most producers are trading in a 0.9X to 1.0X range
Raw Materials and Energy
2. Raw Materials. This is where I want to be. I am heavily invested in a variety of energy names this year. During previous periods of stagflation, both raw materials and energy netted double-digit returns.
I have already mentioned a few names this year, but I am currently looking at selling a little Alpha Metallurgical and TimkenSteel Corporation.
Alpha is already up more than 100% year-to-date. And it’s getting close to the top. I would wait for this one to come back a bit. These guys produce and sell coal. Alpha owns and operates twenty active mines and eight coal preparation and load-out facilities. The company was formerly known as Contura Energy, Inc. and changed its name to Alpha Metallurgical Resources, Inc. in 2021.
Get Weekly Updates
Sign up for our weekly newsletter for news, insights, and the latest investment details.
For those of you that are not interested in a “coal” name – the greenies out there – that is fine. I totally respect that. Take a look at TimkenSteel instead. Not that steel producers are “green”, but at least you don’t have to deal with images of mountain tops blasting away in West Virginia.
TimkenSteel Corporation manufactures and sells alloy steel, and carbon and micro-alloy steel products in the United States and internationally.
TimkenSteel has great momentum. It is up 21% over the past three months; 37% over the past 6 months; and 74% over the past twelve months.
The company remains very profitable.
And the valuation is still attractive relative to peers in the sector.
Other names I would point you to include the following:
Ovinitiv Inc. (“OVV”)
Antero Resources (“AR”)
Crescent Point Energy (“CPG”)
Vermilion Energy Inc. (“VET”)
Gran Tierra Energy Inc. (“GTE”)
As an aside… the movie, American Pie, was made 24 years ago. Yep. You are old. And so am I. Which makes me wonder what Jennifer Coolidge, aka Stifler’s mom, is up to these days. Did you know she is related to President Calvin Coolidge? It’s true.
I am/we are long STOCK(s) GLD, GSV, OVV, CPG, either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.
Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.