By Ed Ponsi
Inflation hasn't been a major problem in America for over a decade, but with estimates for U.S. second-quarter GDP clocking in at 4.1%, the era of low inflation could be coming to an end. How can investors limit the damage that inflation can wreak on a portfolio?
One way is to own stocks that benefit in some way from inflation. For example, in a strong growth/rising inflation environment, crude oil prices tend to rise, along with demand. Because of this, oil companies could be the beneficiaries of rising prices.
Investors can hedge against inflation by adding traditional, large-cap energy companies such as Exxon Mobil Corp. (XOM) or Chevron Corp. (CVX) to their portfolios. However, there are some smaller names that are arguably better positioned to take advantage of rising prices. One such name is Carrizo Oil & Gas Inc. (CRZO) :
Carrizo reached a 12-month high last month (Point A above), and now the stock is well off that high. After reporting second-quarter earnings earlier this month, Carrizo fell 12% over two market sessions.
That post-earnings plunge is pushing the stock down to support, located near $23.50 (red dotted line). In addition, Carrizo's Relative Strength Indicator (RSI) shows the stock just barely above oversold levels (shaded yellow above). Soon, this stock could be both oversold and trading at support, a great combination for buyers.
Another area that has strong potential in a high-growth, high-inflation environment is mining. Simply put, strong growth leads to construction. If a construction boom should occur, companies that produce iron ore, copper and other base metals stand to gain as demand begins to climb. This investment also acts as hedge against inflation, as metals prices tend to rise in an inflationary environment.
One of the best-looking charts in this sector belongs to BHP Billiton Ltd. (BHP) . This stock has been in a bullish channel since the start of 2016. BHP Billiton's 50-week moving average (red) provides additional support at the low end of the channel:
Financial services companies also tend to outperform in an inflationary environment. During inflationary periods, the spread between short- and long-term bond yields tends to widen. This widening helps the bottom line of financial institutions, which borrow at the low end of the yield curve (lower interest rates) and lend at the high end (higher interest rates).
One name in this sector that looks particularly attractive is Wells Fargo & Co. (WFC) . This stock has been trending higher within a bullish channel since May and closed at a four-month high recently:
Inflation is generally a negative for stocks, as rising interest rates make fixed-income investments more competitive. But by adding names that benefit from inflation to our portfolios, we can mitigate the damage caused by rising prices.
This article was originally appeared on Real Money Pro, our site for Wall Street professionals, on Aug. 9. To great great columns like this from Ed Ponsi and other columnists every trading day, click here.