Strike Oil Tycoon Riches With These Two Plays
In my last Wealth Watch article, I alerted you to the fact the recent market trends have shifted significantly so far this year.
Specifically, commodities and commodity-producing stocks have led the way while consumer staples, tech and industrial stocks have floundered.
Inflation is back on the scene in a big way. Employment costs are now rising at the fastest pace in nearly a decade. And raw material input costs for everything from food to fuel are likewise on the rise.
How do stocks typically respond to inflation?
The answer isn’t so straightforward.
Historically, stocks have performed well in a climate of moderate inflation, according to data from Merrill Lynch.
Stocks offer some of the best total returns, adjusted for inflation, when consumer prices are rising about 2–3% per year.
However, once inflation moves much beyond that, rising expenses catch up with stocks, crimping profit margins.
This is especially true for companies with high fixed costs: stocks with high labor, debt and input costs.
That’s when most stocks begin to struggle. While we’re not there yet, at the rate inflation has accelerated over the past year it won’t be long.
But rising inflation isn’t bad news for all stocks, as you can see in the graphic below…
Source: BofA, U.S. Equity & Quant Strategy, FactSet
Commodity stocks tend to perform very well in periods of rising inflation. As you can see above, the two best performers by far are energy and real estate. Two of the most pure natural resource sectors.
Energy in particular looks very attractive right now. The sector has already turned up after a long decline.
In fact, oil and gas producers as a group are up over 20% since the February low, while the S&P 500 meanwhile is basically unchanged since then. That said, energy may still have a long way to go on the upside.
In fact, in spite of the recent outperformance, the oil and gas industry is still down more than 50% from its highs in 2014!
What’s the best way to profit from it?
For my money, select oil and gas producers — that pay you a rich dividend while you wait for appreciation — are your best bet.
Tops on my list is global energy giant Royal Dutch Shell (NYSE: RDS.B), up about 12% since the February low. Even better, the stock pays a fat 5.3% annual dividend.
Another easy way to profit from the sector as a whole is the iShares Dow Jones U.S. Energy Sector Index ETF (IYE). The ETF is up about 11% from the lows and still more than 30% off its high in 2014.
Bottom line: Commodities and commodity-producing stocks are outperforming right now, fueled by rising inflation.
The rally in commodity stocks, especially energy, is just getting started. Don’t miss out on a gusher of profit potential.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch