In this article, we discuss the 10 stocks that are benefiting from rising inflation. If you want to skip our detailed analysis of these stocks, go directly to the 5 Stocks That are Benefiting From Rising Inflation.
On February 19, a group of market experts at JPMorgan Chase & Co. (NYSE:JPM) predicted that the United States Federal Reserve was likely to raise interest rates by 25 basis points at nine consecutive meetings up until March 2023 as it cracks down on inflation. Data shows that the Consumer Price Index, which the central bank uses as an inflation benchmark, climbed close to 7.5% year-over-year in January, a record increase last seen almost four decades ago. The surge is expected to increase the pressure on the Fed to raise the interest rates.
The geo-political crisis in Ukraine and the threat of a Russian invasion have also contributed to the rise in costs for oil and other products. The US Department of Commerce is expected to release numbers for income, new home sales, and goods orders in the coming days, all expected to have a bearing on the Fed decision on a rate hike next month. Apart from the US, economists in Europe, Africa, and the Asia-Pacific are also considering raising rates as inflation continues to surge across the globe.
In this macro-environment, investors are eagerly looking towards stocks that can benefit from a hike in interest rates. During periods of inflation, sectors like finance, consumer goods, and energy tend to perform better than others since a rising interest rate environment increases their earnings. Some of the top stocks to play this rise in inflation and the expected interest rate hike include Bank of America Corporation (NYSE:BAC) and Johnson & Johnson (NYSE:JNJ), among others discussed in detail below.
Photo by Fikri Rasyid on Unsplash
Our Methodology
These were picked based on business fundamentals and analyst ratings. Hedge fund sentiment was also included as a classifier. Companies that have pricing power in addition to stable revenues were preferred for the list.
The hedge fund sentiment around each stock was calculated using the data of around 900 elite hedge funds tracked by Insider Monkey in the fourth quarter of 2021.
Stocks That are Benefiting From Rising Inflation
10. Chubb Limited (NYSE:CB)
Number of Hedge Fund Holders: 34
Chubb Limited (NYSE:CB) provides insurance products. Hedge funds have been loading up on the stock in recent months. At the end of the fourth quarter of 2021, 34 hedge funds in the database of Insider Monkey held stakes worth $1.7 billion in Chubb Limited (NYSE:CB), compared to 30 the preceding quarter worth $1.2 billion.
Chubb Limited (NYSE:CB) will benefit from inflation since insurance firms typically use excess capital to generate interest income. Amid rising inflation, there is also a high possibility of higher interest rates. As these rates increase, so does the income generated on that interest.
On February 4, Raymond James analyst Gregory Peters maintained a Strong Buy rating on Chubb Limited (NYSE:CB) stock and raised the price target to $240 from $220, noting that the shares will “remain above loss trends” through 2022 even though the rate of increase is expected to “gradually moderate”.
Just like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Johnson & Johnson (NYSE:JNJ), Chubb Limited (NYSE:CB) is one of the stocks that value investors have their eye on.
In its Q4 2020 investor letter, Davis Funds, an asset management firm, highlighted a few stocks and Chubb Limited (NYSE:CB) was one of them. Here is what the fund said:
“Chubb Limited (NYSE:CB) is now among the Fund’s largest P&C holdings at 5.2% and illustrates well why we thought there was an opportunity to add to our P&C names. Through September 30, 2020, Chubb had returned −24% for the year, reflecting investors’ fears that (1) the insurance industry would be compelled to cover substantial business interruption claims that were never intended as part of insured’s policies, (2) declining long-term rates would diminish the value of “float” (i.e., customers’ funds that insurers get to hold and invest until claims are paid), and (3) adverse trends (pre-dating the pandemic) in insured loss rates (e.g., rising litigation and settlement costs, increased frequency and severity of catastrophe losses, etc.).
With industry economics already soft, it was only a matter of time before insurance pricing would have to adjust. In fact, P&C pricing had already begun to increase in a number of business lines before COVID hit, and that trend has only increased and broadened since then. Chubb Limited (NYSE:CB) disclosed in Q3 2020 that North American commercial P&C pricing increased by more than 15% in aggregate. Some of the price increase will go to cover rising insurance loss rates, but we certainly do anticipate some dropping into underwriting profit too. Admittedly, some of that increased underwriting profit will itself get offset by a decline in investment income owing to lower interest rates, but that is a “feature,” if you will, of P&C insurance companies. Unlike a bank, where the floor on its deposit funding costs practically speaking is zero, there is in theory no reason underwriting profit cannot increase to offset low interest rates, so it is feasible for its earnings to “normalize” far in advance of an eventual rise in long-term rates.
With respect to the setting of loss reserves, we have always admired Chubb’s conservative approach in establishing cautious initial loss estimates and in recognizing the bad news first. In terms of COVID related losses, Chubb Limited (NYSE:CB) reserved $1.4 billion for customers’ claims in the second quarter, the majority of which were “incurred but not reported” loss estimates for professional and general liability lines that would be the second- and third-order impacts of the virus. Like the banks’ “life-of-loan” reserving described above, Chubb has made an honest effort to put all of COVID’s financial impact behind it.
When we started adding to our position in Chubb Limited (NYSE:CB) this year, it was valued at 1.6x tangible book value, and we expect it has the potential to earn a mid-teens return on capital over time and for it to grow decently and gain market share over time.”
9. Colgate-Palmolive Company (NYSE:CL)
Number of Hedge Fund Holders: 48
Colgate-Palmolive Company (NYSE:CL) makes and sells consumer products. Interest in the stock has grown as inflation rises and the market becomes more volatile. In this environment, the stable dividends that Colgate-Palmolive Company (NYSE:CL) offers attract a lot of buyers. The company has paid a dividend to shareholders for over five decades. On January 20, it declared a quarterly dividend of $0.45 per share, in line with previous.
Colgate-Palmolive Company (NYSE:CL) stands to benefit from inflation because it enjoys pricing power in the consumer goods space. As inflation rises, so does the cost of goods. Although this typically discourages buyers in other industries, Colgate-Palmolive Company (NYSE:CL) can pass these increased cost down to customers without affecting sales too much.
Elite hedge funds are exceedingly bullish on Colgate-Palmolive Company (NYSE:CL) amid rising inflation. Among the hedge funds being tracked by Insider Monkey, New York-based investment firm First Eagle Investment Management is a leading shareholder in Colgate-Palmolive Company (NYSE:CL) with 11.5 million shares worth more than $988 million.
Here is what First Eagle Investment Management has to say about Colgate-Palmolive Company (NYSE:CL) in its Q1 2021 investor letter:
“The leading detractors in the quarter (included) Colgate-Palmolive Company (NYSE:CL). After a strong 2020 fueled in part by lockdown-driven demand, consumer staples stocks generally cooled during the first quarter as investors shifted attention to the more economically sensitive areas of the market likely to benefit from re-openings and improved discretionary spending. The effects of this rotation could be seen in the share price underperformance of names like Colgate-Palmolive Company (NYSE:CL).”
8. Devon Energy Corporation (NYSE:DVN)
Number of Hedge Fund Holders: 51
Devon Energy Corporation (NYSE:DVN) operates as an independent energy firm. It is one of the top energy stocks on Wall Street. Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Devon Energy Corporation (NYSE:DVN) with 14 million shares worth more than $638 million.
The rise in inflation has also brought along a rise in energy prices. Oil giants like Devon Energy Corporation (NYSE:DVN) have high operating leverage. This helps these firms deliver more profits as revenue rises. The energy industry also has better better pricing power than other sectors during times of inflation.
On January 14, Truist analyst Neal Dingmann maintained a Buy rating on Devon Energy Corporation (NYSE:DVN) stock and raised the price target to $65 from $60, noting that oil-weighted names deserved higher price targets given the macro-economic environment in the beginning of 2022 and forecasts for the next few months.
In its Q4 2020 investor letter, GoodHaven Capital Management, an asset management firm, highlighted a few stocks and Devon Energy Corporation (NYSE:DVN) was one of them. Here is what the fund said:
“After a rough start to the year our two biggest energy holdings – WPX Energy rebounded materially in the last six months though energy was still our biggest detractor for the year. I’ve previously written about deciding earlier this year to direct new capital towards better businesses versus adding more to the energy sector, but given the material optionality at WPX, we opted to maintain a material exposure. Recently WPX announced an all stock merger with a larger competitor – Devon Energy Corporation (NYSE:DVN) – which will leave the new company with plenty of cash flow at lower oil prices, less leverage, and material upside to higher commodity prices.”
7. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 53
Chevron Corporation (NYSE:CVX) is an integrated oil and gas firm based in California. Interest in the stock has risen as energy prices climb along with inflation. The crisis in Ukraine has been another catalyst for the stock as investors bet on energy prices to climb further if Russia invades Ukraine, triggering economic sanctions that would disrupt the oil supply from Moscow.
The hedge fund sentiment around Chevron Corporation (NYSE:CVX) is also positive. At the end of the fourth quarter of 2021, 53 hedge funds in the database of Insider Monkey held stakes worth $6.5 billion in Chevron Corporation (NYSE:CVX), up from 51 in the preceding quarter worth $4.4 billion.
In its Q1 2021 investor letter, ClearBridge Investments highlighted a few stocks and Chevron Corporation (NYSE:CVX) was one of them. Here is what the fund said:
“While reducing in health care and consumer staples, we increased our exposure to high-quality names in economically sensitive areas of the market. We added to low-cost, high-quality energy names, (including) Chevron Corporation (NYSE:CVX). We are positive on the company’s strong balance sheets, competitive positions and exposure to an economic recovery.”
6. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Holders: 61
Eli Lilly and Company (NYSE:LLY) makes and sells pharmaceutical products. Top hedge funds hold large stakes in the company. Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Eli Lilly and Company (NYSE:LLY) with 1.6 million shares worth more than $460 million.
On January 21, investment advisory DZ Bank upgraded Eli Lilly and Company (NYSE:LLY) stock to Buy from Hold with a price target of $291. Analyst Elmar Kraus issued the ratings update. Eli Lilly and Company (NYSE:LLY) has the pricing power, historical performance, and the stable earnings history to suggest that it can weather the inflation storm better than peers in the biotech marketplace.
Alongside JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Johnson & Johnson (NYSE:JNJ), Eli Lilly and Company (NYSE:LLY) is one of the stocks that institutional investors are buying.
In its Q1 2020 investor letter, Amana Mutual Funds Trust highlighted a few stocks and Eli Lilly and Company (NYSE:LLY) was one of them. Here is what the fund said:
“Even so, Eli Lilly and Company (NYSE:LLY) stood out as one, among a handful, of companies that registered a positive return for the first quarter. In January, Lilly reported excellent fourth quarter results, with revenue growing at a faster clip than over the first three quarters of the year. Eli Lilly and Company (NYSE:LLY) is also financially strong with debt equivalent to only two times EBITDA3 and 12% of market capitalization. Johnson & Johnson, while trailing Eli Lilly and Company (NYSE:LLY), shares many of the same characteristics and also outperformed.”
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Disclosure. None. 10 Stocks That are Benefiting From Rising Inflation is originally published on Insider Monkey.
