Some thoughts about inflation and some protection without guarantees, of course. Just based on past history from 50 years ago.
Stocks That Beat Inflation Before Are a Good Bet Now -- Barrons.com
DOW JONES & COMPANY, INC. 1:19 PM ET 5/21/2021
Symbol Last Price Change
LMT 386.7down -1.62 (-0.4172%)
BA 234.44down +6.79 (+2.9826%)
HON 223.44down +1.31 (+0.5897%)
QUOTES AS OF 01:34:23 PM ET 05/21/2021
Al Root
Inflation data points just keep piling up. More news from companies and economists rolled in on Friday. Now investors have to wonder if inflation will choke off the roaring economic recovery underway, and what stocks are best when prices are rising faster than expected. Those aren't easy questions to answer because inflation this high hasn't been around in 30-plus years.
Barron's found a few stocks that look like good inflation performers, and they all held up the last time inflation was a big deal.
Deere has one of stocks that worked in prior inflation-laden eras and is one of the companies illustrating that inflation is becoming a problem. It reported fantastic earnings Friday morning. Shares are up 3.3% in midday trading. By comparison, the Dow Jones Industrial Average is up 0.8%, and the S&P 500 has gained 0.3%.
The maker of farm and construction machinery beat analyst earnings projections, and raised full-year guidance. Pricing helped.
"Price realization in the quarter was positive by nearly 9 points," said Deere Ag & Turf President Cory Reed on the company's conference call. That's corporate-speak for tractors are getting expensive. In late 2019, before pandemic. Deere price increases were running in the 3%-a-year range.
Farmers, for the most part, don't care yet because ag-commodity prices are up. Corn prices are up about 35% year to date. "Farmers are partying, " International Agribusiness Group managing director Mark Feight tells Barron's. "But they have anxiety about higher costs."
Anxiety is rising because too much of a good thing is a bad thing. One company's price increase is another's cost increase.
Friday, along with Deere earnings, the Markit U.S. manufacturing and service purchasing managers indexes, or PMIs, both came in above what pundits were projecting. The U.S. Markit composite PMI came in at 68.1. A reading of 50 or higher indicates economic growth; below 50 indicates a decrease. The reading came in at 27 in April 2020, amid Covid-19 lockdowns.
Growth is good, but pricing is impacting the reading. "Increasing cost burdens continued to be keenly felt, as the rate of input price inflation soared to a newsurvey record high," reads the Markit news release. "Often linked to a further marked worsening of supplier performance. Commonly noted were increases in [personal protective equipment], fuel, metals, and freight costs amid significant supplier delays."
The fact that fuel and metals are elevated offers investors some hope. Commodity price increases tend to be transitory. "Prices won't stay above the cost of production for very long," adds Feight. He's talking about agricultural commodities. But the lesson is the same for all commodities. High prices attract more supply.
But U.S. job openings are also at record 8.1 million. That seems to indicate labor is in short supply. And every day there is a story about rising wages. Walmart (WMT) is one of America's largest employers with about 1.6 million workers in the U.S., and 2.3 million workers when including overseas operations. The retailing giant announced wage hikes in February.
If inflation is here investors need to know what to do. Professional investors younger than 65 have only known investing in a period of relatively low inflation and falling bond yields. The last time inflation was a big problem might be the 1970s when it hit double digits rates in 1974 and 1979.
Deere stock was a stellar performer in the 1970s. Shares went from roughly $1.75 to $7, excluding dividends and adjusted for stock splits, rising about 300% in the decade, or 15% a year on average. The S&P 500, for comparison, rose about 17% for the entire decade, excluding dividends.
Other large industrial companies performed well in the 1970s, too. Caterpillar (CAT) stock gained about 175% over the decade, excluding dividends, or about 6% a year on average.
Lockheed Martin (LMT) , Boeing(BA) , and Honeywell International(HON) shares gained about 12.5%, 7%, and 20% a year on average, respectively, through the 1970s.
The gains were not in a straight line. There were two inflation-induced recession in the decade. Not all large industrial-conglomerate stocks did great. General Electric (GE) and Emerson Electric (EMR) shares didn't do much.
The ones that did do well had something in common: Solid market shares in industries where their customers were seeing rising prices, too. Corn prices in the 1970s went from roughly $1.20 a bushel to almost $3. Oil prices rose from $3 a barrel to more than $30.
ExxonMobil (XOM) stock had a good, but not great, decade in the 1970s. Shares rose about 5% a year on average, excluding dividends. Costs probably rose a lot with its product prices. Oil companies have to spend money to explore and they exploit higher cost resources as prices rise.
It's only safe to say probably because it's difficult to go back to the mid-70s and judge investor, analyst, and management comments. Half a century was a long time ago, but there are some lessons to be learned from the past. And the 1970s might hold some important lessons for investors in coming year.
Write to Al Root at allen.root@dowjones.com
