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How to Invest with Inflation Rates Rising

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The BLS released Consumer Price Index (CPI) numbers for the 12 months ending April that continued to show an upward trend (up 4.2%, largest increase since Sep 2008). The biggest contributors to the increase were energy (up 25.1%) and used cars and trucks (up 21.0%). Excluding the most volatile food and energy items, the index was up 3.0%.

For the month of April, the all-items index was up 0.8% (up 2.4% excluding food and energy), with used cars and trucks jumping 10.0% (the largest single-month increase since 1953 when the tracking started) and energy declining 0.1%. Excluding the most volatile food and energy items, the index was up 0.9%.

Prices are increasing across food (at home and away), electricity, transportation and commodities. Everything in fact than energy, which declined. This usually means a reduction in purchasing power, which is not so great for the average household. But with employment levels back up, stimulus money flowing in and pent-up demand from newly-vaccinated consumers, we’re unlikely to see things cooling down this year.

That is unless the Fed steps in with a rate increase, which it might well do since we’re already well above the Fed’s long-time target of 2.0%, as well as the “moderately above 2.0%” that Powell is targeting now.

So where does that leave the regular investor?

Inflationary situations can lead you to choose value over growth stocks.

That’s because growth stocks usually belong to young, cash-hungry companies that are investing in the future. When costs go up, it means they can do less with their resources. Also, transferring the higher costs to consumers takes time, so there’s a period during which they may be squeezed. Of course, I’m not talking about the big technology companies that continue to grow like puppies despite their size.

Value stocks on the other hand belong to more mature companies with lower growth rates and steadier cash flows that they may also distribute to investors as dividend. Since inflationary conditions reduce purchasing power of money, dividends become less valuable at this time. So the market typically discounts these stocks and it’s definitely a negative, short-term. But if you’re playing a long-term game, this may be just the time to get into some good dividend stocks because they’re likely to be cheaper.

You may also favor sectors that are rebounding strongly to increase your chances of success. So construction, retail, industrial, finance, materials and transportation may be better places to put your money. But there may be opportunities outside these sectors as well and you can identify them with the stock’s Industry Rank. The Zacks Industry Rank has proved extremely effective in selecting winners when used in combination with the Zacks Rank.

The stocks I’ve selected today are larger cap players, since they can provide stability. So they are mostly focused on industrials and materials. But if you don’t mind smaller cap players, there are several possibilities in the retail, finance and construction sectors as well.

Here are 5 stocks that are looking good now-

CNOOC Limited (CEO - Free Report)

Cnooc Limited is a company that engages primarily in the exploration, development and production of crude oil and natural gas offshore China. It is the dominant producer of crude oil and natural gas and the only company permitted to conduct exploration and production activities with international oil and gas companies.

The shares carry a Zacks Rank #1 (Strong Buy) and Value Score A (best suited for value investors). They belong to the Oil and Gas - Integrated - Emerging Markets industry, which is in the top 2% of Zacks-classified industries (the top 50% generally outperform the bottom 50% by a factor of 2 to 1).

The company’s dividend yields 6.15%.

Mitsui & Co. (MITSY - Free Report)

The Mitsui Group is a global empire comprising more than 860 subsidiaries and associated companies with operations in chemicals, foodstuffs, general merchandise, iron and steel, machinery, nonferrous metals, textiles, energy, and real estate and service industries.

The shares carry a Zacks Rank #1 (Strong Buy) and Value Score A. They belong to the Metal Products – Distribution industry, which is in the top 2% of Zacks-classified industries.

The company’s dividend yields 2.93%.

POSCO (PKX - Free Report)

POSCO, formerly known as Pohang Iron & Steel Company Ltd., manufactures hot and cold rolled steel products, heavy plate and other steel products for the construction and shipbuilding industries.

The shares carry a Zacks Rank #1 (Strong Buy) and Value Score A. They belong to the Steel - Producers industry, which is in the top 10% of Zacks-classified industries.

The company’s dividend yields 3.88%.

Ternium S.A. (TX - Free Report)

Ternium is the leading producer of flat and long steel products in Latin America and consolidates the operations of the steel companies Hylsa in Mexico, Siderar in Argentina and Sidor in Venezuela.

The shares carry a Zacks Rank #1 (Strong Buy) and Value Score A. They belong to the Steel - Producers industry, which is in the top 10% of Zacks-classified industries.

The company’s dividend yields 5.20%.

Marubeni Corp. (MARUY - Free Report)

Tokyo, Japan-based Marubeni Corporation purchases, distributes, and markets various industrial and consumer goods worldwide. It imports, exports and trades within the Japanese market in food, textiles, materials, pulp and paper, chemicals, energy, metals and mineral resources and transportation machinery. It is also engaged in power projects and infrastructure, plants and industrial machinery, real estate development and construction, finance, logistics and information industries.

The shares carry a Zacks Rank #1 (Strong Buy) and Value Score A. They belong to the Diversified Operations industry, which is in the top 39% of Zacks-classified industries.

 

The company’s dividend yields 1.97%.

One-Month Price Performance

 

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