In this article, we discuss the 10 stocks that are benefiting from rising inflation.
On February 19, a group of market experts at JPMorgan Chase & Co. (NYSE:JPM) predicted that the United States Federal Reserve was likely to raise interest rates by 25 basis points at nine consecutive meetings up until March 2023 as it cracks down on inflation. Data shows that the Consumer Price Index, which the central bank uses as an inflation benchmark, climbed close to 7.5% year-over-year in January, a record increase last seen almost four decades ago. The surge is expected to increase the pressure on the Fed to raise the interest rates.
The geo-political crisis in Ukraine and the threat of a Russian invasion have also contributed to the rise in costs for oil and other products. The US Department of Commerce is expected to release numbers for income, new home sales, and goods orders in the coming days, all expected to have a bearing on the Fed decision on a rate hike next month. Apart from the US, economists in Europe, Africa, and the Asia-Pacific are also considering raising rates as inflation continues to surge across the globe.
In this macro-environment, investors are eagerly looking towards stocks that can benefit from a hike in interest rates. During periods of inflation, sectors like finance, consumer goods, and energy tend to perform better than others since a rising interest rate environment increases their earnings. Some of the top stocks to play this rise in inflation and the expected interest rate hike include Bank of America Corporation (NYSE:BAC) and Johnson & Johnson (NYSE:JNJ), among others discussed in detail below.
Photo by Fikri Rasyid on Unsplash
Our Methodology
These were picked based on business fundamentals and analyst ratings. Hedge fund sentiment was also included as a classifier. Companies that have pricing power in addition to stable revenues were preferred for the list.
The hedge fund sentiment around each stock was calculated using the data of around 900 elite hedge funds tracked by Insider Monkey in the fourth quarter of 2021.
Stocks That are Benefiting From Rising Inflation
10. Chubb Limited (NYSE:CB)
Number of Hedge Fund Holders: 34
Chubb Limited (NYSE:CB) provides insurance products. Hedge funds have been loading up on the stock in recent months. At the end of the fourth quarter of 2021, 34 hedge funds in the database of Insider Monkey held stakes worth $1.7 billion in Chubb Limited (NYSE:CB), compared to 30 the preceding quarter worth $1.2 billion.
Chubb Limited (NYSE:CB) will benefit from inflation since insurance firms typically use excess capital to generate interest income. Amid rising inflation, there is also a high possibility of higher interest rates. As these rates increase, so does the income generated on that interest.
On February 4, Raymond James analyst Gregory Peters maintained a Strong Buy rating on Chubb Limited (NYSE:CB) stock and raised the price target to $240 from $220, noting that the shares will “remain above loss trends” through 2022 even though the rate of increase is expected to “gradually moderate”.
Just like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Johnson & Johnson (NYSE:JNJ), Chubb Limited (NYSE:CB) is one of the stocks that value investors have their eye on.
In its Q4 2020 investor letter, Davis Funds, an asset management firm, highlighted a few stocks and Chubb Limited (NYSE:CB) was one of them. Here is what the fund said:
“Chubb Limited (NYSE:CB) is now among the Fund’s largest P&C holdings at 5.2% and illustrates well why we thought there was an opportunity to add to our P&C names. Through September 30, 2020, Chubb had returned −24% for the year, reflecting investors’ fears that (1) the insurance industry would be compelled to cover substantial business interruption claims that were never intended as part of insured’s policies, (2) declining long-term rates would diminish the value of “float” (i.e., customers’ funds that insurers get to hold and invest until claims are paid), and (3) adverse trends (pre-dating the pandemic) in insured loss rates (e.g., rising litigation and settlement costs, increased frequency and severity of catastrophe losses, etc.).
With industry economics already soft, it was only a matter of time before insurance pricing would have to adjust. In fact, P&C pricing had already begun to increase in a number of business lines before COVID hit, and that trend has only increased and broadened since then. Chubb Limited (NYSE:CB) disclosed in Q3 2020 that North American commercial P&C pricing increased by more than 15% in aggregate. Some of the price increase will go to cover rising insurance loss rates, but we certainly do anticipate some dropping into underwriting profit too. Admittedly, some of that increased underwriting profit will itself get offset by a decline in investment income owing to lower interest rates, but that is a “feature,” if you will, of P&C insurance companies. Unlike a bank, where the floor on its deposit funding costs practically speaking is zero, there is in theory no reason underwriting profit cannot increase to offset low interest rates, so it is feasible for its earnings to “normalize” far in advance of an eventual rise in long-term rates.
With respect to the setting of loss reserves, we have always admired Chubb’s conservative approach in establishing cautious initial loss estimates and in recognizing the bad news first. In terms of COVID related losses, Chubb Limited (NYSE:CB) reserved $1.4 billion for customers’ claims in the second quarter, the majority of which were “incurred but not reported” loss estimates for professional and general liability lines that would be the second- and third-order impacts of the virus. Like the banks’ “life-of-loan” reserving described above, Chubb has made an honest effort to put all of COVID’s financial impact behind it.
When we started adding to our position in Chubb Limited (NYSE:CB) this year, it was valued at 1.6x tangible book value, and we expect it has the potential to earn a mid-teens return on capital over time and for it to grow decently and gain market share over time.”
9. Colgate-Palmolive Company (NYSE:CL)
Number of Hedge Fund Holders: 48
Colgate-Palmolive Company (NYSE:CL) makes and sells consumer products. Interest in the stock has grown as inflation rises and the market becomes more volatile. In this environment, the stable dividends that Colgate-Palmolive Company (NYSE:CL) offers attract a lot of buyers. The company has paid a dividend to shareholders for over five decades. On January 20, it declared a quarterly dividend of $0.45 per share, in line with previous.
Colgate-Palmolive Company (NYSE:CL) stands to benefit from inflation because it enjoys pricing power in the consumer goods space. As inflation rises, so does the cost of goods. Although this typically discourages buyers in other industries, Colgate-Palmolive Company (NYSE:CL) can pass these increased cost down to customers without affecting sales too much.
Elite hedge funds are exceedingly bullish on Colgate-Palmolive Company (NYSE:CL) amid rising inflation. Among the hedge funds being tracked by Insider Monkey, New York-based investment firm First Eagle Investment Management is a leading shareholder in Colgate-Palmolive Company (NYSE:CL) with 11.5 million shares worth more than $988 million.
Here is what First Eagle Investment Management has to say about Colgate-Palmolive Company (NYSE:CL) in its Q1 2021 investor letter:
“The leading detractors in the quarter (included) Colgate-Palmolive Company (NYSE:CL). After a strong 2020 fueled in part by lockdown-driven demand, consumer staples stocks generally cooled during the first quarter as investors shifted attention to the more economically sensitive areas of the market likely to benefit from re-openings and improved discretionary spending. The effects of this rotation could be seen in the share price underperformance of names like Colgate-Palmolive Company (NYSE:CL).”
8. Devon Energy Corporation (NYSE:DVN)
Number of Hedge Fund Holders: 51
Devon Energy Corporation (NYSE:DVN) operates as an independent energy firm. It is one of the top energy stocks on Wall Street. Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Devon Energy Corporation (NYSE:DVN) with 14 million shares worth more than $638 million.
The rise in inflation has also brought along a rise in energy prices. Oil giants like Devon Energy Corporation (NYSE:DVN) have high operating leverage. This helps these firms deliver more profits as revenue rises. The energy industry also has better better pricing power than other sectors during times of inflation.
On January 14, Truist analyst Neal Dingmann maintained a Buy rating on Devon Energy Corporation (NYSE:DVN) stock and raised the price target to $65 from $60, noting that oil-weighted names deserved higher price targets given the macro-economic environment in the beginning of 2022 and forecasts for the next few months.
In its Q4 2020 investor letter, GoodHaven Capital Management, an asset management firm, highlighted a few stocks and Devon Energy Corporation (NYSE:DVN) was one of them. Here is what the fund said:
“After a rough start to the year our two biggest energy holdings – WPX Energy rebounded materially in the last six months though energy was still our biggest detractor for the year. I’ve previously written about deciding earlier this year to direct new capital towards better businesses versus adding more to the energy sector, but given the material optionality at WPX, we opted to maintain a material exposure. Recently WPX announced an all stock merger with a larger competitor – Devon Energy Corporation (NYSE:DVN) – which will leave the new company with plenty of cash flow at lower oil prices, less leverage, and material upside to higher commodity prices.”
7. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 53
Chevron Corporation (NYSE:CVX) is an integrated oil and gas firm based in California. Interest in the stock has risen as energy prices climb along with inflation. The crisis in Ukraine has been another catalyst for the stock as investors bet on energy prices to climb further if Russia invades Ukraine, triggering economic sanctions that would disrupt the oil supply from Moscow.
The hedge fund sentiment around Chevron Corporation (NYSE:CVX) is also positive. At the end of the fourth quarter of 2021, 53 hedge funds in the database of Insider Monkey held stakes worth $6.5 billion in Chevron Corporation (NYSE:CVX), up from 51 in the preceding quarter worth $4.4 billion.
In its Q1 2021 investor letter, ClearBridge Investments highlighted a few stocks and Chevron Corporation (NYSE:CVX) was one of them. Here is what the fund said:
“While reducing in health care and consumer staples, we increased our exposure to high-quality names in economically sensitive areas of the market. We added to low-cost, high-quality energy names, (including) Chevron Corporation (NYSE:CVX). We are positive on the company’s strong balance sheets, competitive positions and exposure to an economic recovery.”
6. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Holders: 61
Eli Lilly and Company (NYSE:LLY) makes and sells pharmaceutical products. Top hedge funds hold large stakes in the company. Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Eli Lilly and Company (NYSE:LLY) with 1.6 million shares worth more than $460 million.
On January 21, investment advisory DZ Bank upgraded Eli Lilly and Company (NYSE:LLY) stock to Buy from Hold with a price target of $291. Analyst Elmar Kraus issued the ratings update. Eli Lilly and Company (NYSE:LLY) has the pricing power, historical performance, and the stable earnings history to suggest that it can weather the inflation storm better than peers in the biotech marketplace.
Alongside JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and Johnson & Johnson (NYSE:JNJ), Eli Lilly and Company (NYSE:LLY) is one of the stocks that institutional investors are buying.
In its Q1 2020 investor letter, Amana Mutual Funds Trust highlighted a few stocks and Eli Lilly and Company (NYSE:LLY) was one of them. Here is what the fund said:
“Even so, Eli Lilly and Company (NYSE:LLY) stood out as one, among a handful, of companies that registered a positive return for the first quarter. In January, Lilly reported excellent fourth quarter results, with revenue growing at a faster clip than over the first three quarters of the year. Eli Lilly and Company (NYSE:LLY) is also financially strong with debt equivalent to only two times EBITDA3 and 12% of market capitalization. Johnson & Johnson, while trailing Eli Lilly and Company (NYSE:LLY), shares many of the same characteristics and also outperformed.”
5. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders: 67
The Procter & Gamble Company (NYSE:PG) provides branded consumer packaged goods. Elite hedge funds are bullish on the stock. Among the hedge funds being tracked by Insider Monkey, London-based investment firm Cedar Rock Capital is a leading shareholder in The Procter & Gamble Company (NYSE:PG) with 6 million shares worth more than $985 million.
On January 20, Morgan Stanley analyst Dara Mohsenian maintained an Overweight rating on The Procter & Gamble Company (NYSE:PG) stock and raised the price target to $177 from $161, underlining that robust sales and market share results were “offsetting industry pressures” for the firm from a cost and foreign exchange standpoint.
The Procter & Gamble Company (NYSE:PG) will benefit from inflation since the company can pass on the increasing costs of goods to consumers. Since The Procter & Gamble Company (NYSE:PG) sells essential products and has a healthy brand name, this price increase is likely to be absorbed without affecting sales too much.
4. Bristol-Myers Squibb Company (NYSE:BMY)
Number of Hedge Fund Holders: 66
Bristol-Myers Squibb Company (NYSE:BMY) is a New York-based biopharmaceutical firm. The company posted earnings for the fourth quarter on February 4, reporting earnings per share of $1.83, beating market estimates by $0.03. The revenue over the period was $12 billion, up over 8% year-on-year.
Bristol-Myers Squibb Company (NYSE:BMY) stock stands to benefit from inflation since the company offers investors safe haven during times of crisis. This is reflected in the dividend history of Bristol-Myers Squibb Company (NYSE:BMY) that stretched back more than three decades. Over the past fifteen years, the dividend payouts have steadily increased regardless of market situation.
Top hedge funds hold large stakes in Bristol-Myers Squibb Company (NYSE:BMY). At the end of the fourth quarter of 2021, 66 hedge funds in the database of Insider Monkey held stakes worth $3.3 billion in Bristol-Myers Squibb Company (NYSE:BMY), compared to 74 in the previous quarter worth $4.7 billion.
In its Q4 2020 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and Bristol-Myers Squibb Company (NYSE:BMY) was one of them. Here is what the fund said:
“Bristol-Myers Squibb recently reported accelerating sales as much of the medical services industry returned to work. The Company continues to expect double-digit earnings growth over the next few years, driven by existing drugs, in addition to a broad pipeline of new drugs and indications. While the market remains fixated on a couple of patent expirations that could occur over the next several years, we think this is well-known at this point, yet the market still undervalues a couple of key acquisitions the Company has made in the past few years, particularly Celgene, which was acquired for a song.”
3. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 83
Johnson & Johnson (NYSE:JNJ) makes and sells healthcare products. It is one of the favorite health stocks in the finance world. At the end of the fourth quarter of 2021, 83 hedge funds in the database of Insider Monkey held stakes worth $7.3 billion in Johnson & Johnson (NYSE:JNJ), compared to 88 in the previous quarter worth $6.8 billion.
On January 26, Raymond James analyst Jayson Bedford maintained an Outperform rating on Johnson & Johnson (NYSE:JNJ) stock and raised the price target to $185 from $178, noting that the stock seemed safe for 2022 given an attractive valuation and a more active capital deployment program.
Johnson & Johnson (NYSE:JNJ) is slated for a 60th straight consecutive dividend increase in the first quarter of 2022. Johnson & Johnson (NYSE:JNJ) is also one of the most trusted brands in the healthcare sector with a global reach, shielding the company from market fluctuations in one part of the world, and strong pricing power.
2. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 84
Bank of America Corporation (NYSE:BAC) provides banking and financial products. The stock stands to benefit as the rising rates will increase the earnings of the firm. On February 2, Bank of America Corporation (NYSE:BAC) declared a quarterly dividend of $0.21 per share, in line with previous. The forward yield was 1.79%.
Hedge funds have been piling into Bank of America Corporation (NYSE:BAC) stock in recent months. At the end of the fourth quarter of 2021, 84 hedge funds in the database of Insider Monkey held stakes worth $47 billion in Bank of America Corporation (NYSE:BAC), compared to 72 the preceding quarter worth $46 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Bank of America Corporation (NYSE:BAC) was one of them. Here is what the fund said:
“Higher long-term interest rates supported financials such as Bank of America, which has shown both defensive and offensive characteristics in the past year. We believe it continues to be the least risky large bank from a credit standpoint, with conservative underwriting and controlled risk taking, a leading consumer deposit franchise, scale and technology. It is also a leader in its commitments to sustainability, or as it terms it, responsible growth. Disclosure and reporting at all levels form a large part of this commitment, including gender diversity and equality, environmental commitments and support of communities in which it operates. In the first quarter Bank of America announced it is setting a goal of net-zero greenhouse gas (GHG) emissions in its supply chain and operations, and notably also in its financing activities, before 2050.”
1. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 107
JPMorgan Chase & Co. (NYSE:JPM) operates as a financial services firm. Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in JPMorgan Chase & Co. (NYSE:JPM) with 7.4 million shares worth more than $1.1 billion.
On January 18, UBS analyst Erika Najarian maintained a Buy rating on JPMorgan Chase & Co. (NYSE:JPM) stock with a price target of $197, noting that the near-term negatives for the bank now appeared to be out despite a “complex” 2022 outlook.
As inflation rises, a hike in interest rates seems imminent. The hike would increase the earnings of JPMorgan Chase & Co. (NYSE:JPM) virtually overnight. This earnings boost will also result in more interest in the stock, driving up the potential gains on the shares.
In its Q4 2020 investor letter, Bretton Fund, an asset management firm, highlighted a few stocks and JPMorgan Chase & Co. (NYSE:JPM) was one of them. Here is what the fund said:
“After a strong performance in 2019, we wrote this about our bank stocks in last year’s report: “There will be another recession sooner than later, and our banks will see larger loans losses, but we think this is more than priced into the stock, and our banks are well reserved for that eventuality.” Little did we know “sooner” really meant “a few weeks from now.” Despite the economic shock, the banks still have huge capital cushions that can absorb large loan losses. Our remaining bank investments, JPMorgan and Bank of America, increased their reserves significantly at the beginning of the Covid-19 crisis in anticipation of imminent loan defaults, but with the government stimulus and perhaps a more resilient economy than many would have guessed, actual loan losses are up only slightly. They might happen later in 2021, but with an additional stimulus package and the vaccine rolling out, the large-scale losses may not be as bad as most people predicted. The bigger drag on the banks’ earnings power is lower rates, which in our opinion will persist for a long time. Despite this drag, we estimate both JPMorgan and Bank of America will continue to grow revenue and earnings over the next few years, while we believe their stocks remain bargains in a somewhat expensive market. JPMorgan’s earnings per share declined 17% last year, and its stock returned -5.5%. Bank of America’s earnings, which are more sensitive to interest rates, were down 32%, and its stock returned -11.6%.”
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Disclosure. None. 10 Stocks That are Benefiting From Rising Inflation is originally published on Insider Monkey.
