Looking for Ways to Profit From Inflation? Here Are Some Ideas

Inflation seems to be the only thing people are talking about these days. Skyrocketing food prices. The cost of filling the gas tank. Rising mortgage costs. The list goes on. Even with the rate of inflation gradually declining, pocketbooks are hurting.

The Bank of Canada and other central banks are contributing to the problem by steadily increasing interest rates to dampen demand and slow the economy, to the point where the CPI will slip back towards the 2 per cent target range. Rate hikes are a crude weapon because of the misery they inflict on businesses and individuals, but they seem to be the best option that the central banks can wield in this situation.

Rising interest rates were the main contributor to the woes of the stock markets in 2022. Interest sensitive securities like REITs, utilities, telecoms, and bonds all tumbled as rates marched steadily higher. Combined with the collapse of tech stocks as the stay-at-home pandemic economy dissipated, we ended up with all the major stock markets in the red and the Canadian bond market experiencing its worst loss in four decades.

But there were some inflation-beaters. These securities thrived in a rising price environment and are still doing well, although momentum is slowing. Here are some examples.

 

Fossil Fuel Companies

 

The price at the pumps has dropped in recent weeks as oil prices have eased, but the big producers are still making bucket loads of cash at current levels. We haven’t seen year-end results from any of the major companies yet, but ExxonMobil reported nine-month 2022 profits of just under US$43 billion (US$10.17 per share) compared to US$14.2 billion (US$3.31 per share) in the same period last year. 

It’s the same story in Canada, albeit on a smaller scale. Canadian Natural Resources reported a nine-month adjusted profit of $10.7 billion ($9.20 per diluted share), up from $4.8 billion ($4.04 per share) the year before.

The TSX Capped Energy Index ended the year with a gain of 48.4 per cent and many companies were well ahead of that including Enerplus (+79.2 per cent), Cenovus Energy (+69.4 per cent), and Tourmaline Oil (+67.3 per cent). Oil service companies also did well – Precision Drilling shares gained 132.1 per cent in 2022.

So far, 2023 is off to a positive start for the sector. As of Jan. 27, the S&P/TSX Capped Energy Index was ahead 4.75 per cent. I don’t expect this year’s gains to be anywhere near as robust as those of 2022, but the energy sector should continue to be a source of profits for investors.

 

Food Retailers

 

They have become the number one villain for shoppers and politicians. They claim the rising costs of everything from vegetables to milk is not their fault, but their profits keep rising nonetheless. 

Loblaw Companies reported third quarter net earnings attributable to shareholders of $556 million, an increase of $125 million or 29 per cent from last year. Diluted earnings per share were $1.69, an increase of $0.42, or 33.1 per cent.

Empire Group, which owns Sobeys, Farm Boy, etc., reported second quarter 2023 profits (to Nov. 5) of $189.9 million ($0.73 a share), up from $175.4 million ($0.66 a share) in the previous year. That works out to a gain of 10.6 per cent on a per share basis.

Metro Inc., which had a Sept. 24 year end, reported fiscal 2022 profits of $849.5 million ($3.51 per diluted share) compared to $825.7 million ($3.33 per share) in the previous year. That was a gain of 5.4 per cent on a per share basis. 

Both Metro and Loblaw posted decent gains in their share price last year, of 11.4 per cent and 15.5 per cent respectively. Empire shares actually lost 7.5 per cent in 2022. So far this year, Empire shares are marginally ahead while Loblaw and Metro have slipped slightly.

Looking at the overall picture, inflation has had a modestly positive impact on the food retailers but nothing as dramatic as we saw in the energy sector. Looking forward, public and political pressure will likely force these companies to maintain or even slightly reduce their already thin profit margins this year. Any profit increases will be modest, as will gains in the share price.

 

Gold

 

Here’s a late comer to the inflation party. Gold is typically a refuge in inflationary times but rising interest rates put downward pressure on the metal. (Gold pays no interest so the higher rates rise, the greater the loss in potential interest for owners.) As a result, the S&P/TSX Global Gold Index was down 4.9 per cent last year.

But as the tightening cycle appears to be nearing an end, or at least a pause, gold has regained its luster and investors are buying. The price has moved to US$1,944 an ounce and the Global Gold Index was up 10.46 per cent for the first four weeks of the year. A price of US$2,000 an ounce within the next few weeks is a real possibility.

My go-to stock in the gold sector is Franco-Nevada (FNV-T), which I have owned for years. It’s a royalty streaming company, which means it provides financing to other miners in exchange for a small percentage of the output. This means it bears no exploration, construction, or closing risks. Several other companies operate on this model, but I regard FNV as the preferred choice.

The stock touched a one-year low of $151.07 in September but the recent turnaround in the gold price has pushed it up quickly. It closed Friday at $196.67, up almost 30 per cent from the September low. 

Last month, the company announced a 6.25 per cent increase in its quarterly dividend to US$0.34 a share (US$1.36 a year). The stock yields 0.7 per cent at that price – not a lot but there is good upside potential in the share price if gold moves higher. 

Results for the first nine months of 2022 showed adjusted net income of $532.7 million ($2.78 per share), up 5 per cent from the year before. The company will release final 2022 results on March 15. 

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe 

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