It’s time to face the music.
Inflation is at 40-year highs, with the yield on the 10-year Treasury recently rising above 2.3% for the first time since May 2019. Yields for the three-year, five-year, 20-year and 30-year Treasuries are at 2.38%, 2.39%, 2.71% and 2.6%, respectively.
In other words, the yield curve is basically flat, meaning yields are very similar across the board. When that happens, it could indicate we’re entering an economic slowdown. In fact, the Atlanta Fed predicts first-quarter GDP growth will slow significantly to 1.3%.
Now, the Federal Reserve is looking to tamp down this hideous inflation by raising rates. As I covered last week, the Fed approved an interest rate hike by a quarter-percentage point, and said it anticipates each of the remaining six FOMC meetings could represent a chance to further increase rates.
This triggered some panic selling, but the market bounced back after Fed Chair Jerome Powell reassured investors that the central bank would raise key interest rates gradually.
However, on Monday, Fed Chairman Jerome Powell took a more hawkish stance and said the Fed would go even further and raise rates by larger amounts if needed to reduce inflation that’s running “much too high.” That could mean the Fed will decide to raise rates more than anticipated at its next meeting — by a half a percentage point instead of a quarter percentage point.
The problem is that if the Fed goes too far with rate increases and the yield curve inverts — when long-term yields are less than short-term yields — it’ll hurt the economy and hurt the banks that the Fed regulates. In fact, the yield curve briefly inverted twice this week when the two-year Treasury yield moved higher than the five-year Treasury, and then Wednesday morning, when the five-year Treasury rose above the 10-year Treasury.
Now, I’ve heard talking heads on the financial news recommend financial stocks. If you have, too, then I encourage you to ignore them. Folks, that’s a big mistake right now. Banks are not good investments in a flat yield curve environment like we’re in. Personally, I’m not a fan of the banks. I used to work for a division of the government that is now part of the Federal Reserve. During my time there, I saw how they essentially “cook their books,” and that scarred me for life. The other big problem with an inverted yield curve is that it is also what happens before you go into a recession.
The fact of the matter is that central banks in the U.S. and Europe are facing a reckoning with their policy of unlimited money printing known as Modern Monetary Theory. The question is: Can they dial it back?
I’ll tell you… I don’t think so.
And it’s why I think the Fed will move in baby steps.
I also think we’re going to have stagflation, where inflation will persist while the economy stays stagnant.
This high inflationary environment reminds me in some ways to the late ’70s and ’80s. It was an exciting time for the stock market, as fundamentally superior stocks are clearly a great inflationary hedge, as is real estate.
Interestingly, while the Fed looks to raise rates, existing home sales fell 7.2% in February from the prior month and 2.4% from a year prior. In fact, the unsold existing homes supply increased in February. Potential buyers are contending with both increasing interest rates and rising home prices.
Amidst all this Fed infighting and confusion, you are probably wondering… what is an investor to do?
The answer is to simply load up on fundamentally superior stocks that can serve as inflation hedges that are prospering in the current market environment.
Choosing Superior “Inflation Hedge” Stocks
Case in point: Marathon Oil Corp (MRO).
The company was founded primarily as an oil production company (Ohio Oil Company) back in 1887. For the first 90 years, the business operated as an integrated oil company. But since the refining business was spun off in 2011, Marathon Oil has operated as an independent exploration and production company.
The company operates primarily in the U.S., with facilities and wells in the top four oil-producing basins in the U.S.: Eagle Ford, Bakken, STACK/SCOOP and the Permian Basin.
And at the end of 2021, Marathon Oil had proved reserves of 1,106 million barrels of oil equivalent per day, or a 14% year-over-year increase.
So, it’s not too surprising that Marathon Oil also exceeded analysts’ expectations for its top- and bottom-line growth in the latest quarter. Fourth-quarter revenue rose 24.1% year-over-year to $1.8 billion, beating estimates for $1.54 billion. Fourth-quarter earnings soared 97.4% year-over-year to $592 million, or $0.77 per share, which crushed analysts’ estimates for $0.55 per share by 40%.
Following the better-than-expected results, the analyst community has increased its forecasts for the first quarter. Earnings are now anticipated to grow 200% year-over-year to $0.63 per share, up from previous estimates for $0.56 per share. As you know, positive analyst revisions typically precede future earnings surprises.
I should also add that Marathon Oil is committed to rewarding its shareholders. The company generated more than $2.2 billion in free cash flow in 2021, including $900 million in the fourth quarter. Marathon Oil then returned more than 70% of its fourth-quarter cash flow to investors. The company’s first-quarter dividend of $0.07 per share will be paid on March 10 to all shareholders of record on February 16. The stock has a 1.3% dividend yield.
I recommended the stock to my Growth Investor subscribers about a month ago, and as you can see below, Marathon oil continues to earn top marks in my Portfolio Grader.
The company gets a Total Grade of “A,” a Fundamentals Grade of “B,” and a Quantitative Grade of “A,” representing institutional buying pressure under the stock.
So far this year, Marathon Oil’s stock has risen over 56%, crushing the S&P 500’s 6.2% fall over the same timeframe.
But Marathon Oil is far from the only stock I see benefitting in the current inflationary environment.
As always, our best defense is a strong offense of fundamentally superior stocks that are prospering from inflation. It’s why I’m so excited about my Growth Investor stocks. I was expecting my Growth Investor stocks’ forecasted sales and earnings forecasts to decelerate due to more difficult year-over-year comparisons.
However, thanks to new additions to the Growth Investor Buy List, plus the fact that many of the existing stocks on the Buy List are great inflation hedges, my average Growth Investor stock is now characterized by 51.4% average annual sales growth and 370.9% average annual earnings growth!
This is why they’ve exhibited tremendous relative strength and are benefitting from quarter-end window dressing. The institutional investors are shoring up on my stocks because these are the stocks that will make their clients’ portfolios “pretty.”
I’m expecting similar performance to the six new stocks I will be adding to my Growth Investor Buy Lists on Friday. I will release their names, tickers and why I like these companies after the close on Friday. To get into position early, I recommend you sign up for my Growth Investor service now. (If you join my Platinum Growth Club or Omnia services, not only will you receive my latest Growth Investor recommendations, but you’ll have full access to recommendations in all my other services, too. This includes Breakthrough Stocks, Accelerated Profits, Power Portfolio 2022 and Power Options.)
Three of the new stocks are fertilizer companies profiting from the surge in natural gas prices, as well was the disruption in fertilizer shipments from the Ukraine/Russian conflict.
Two new stocks are U.S. energy companies that are profiting from high crude oil and natural gas prices, plus they are key to helping make the U.S. energy independent again. Finally, I am adding a building materials supplier that is benefitting from soaring prices of building materials.
In other words, all our new buys are poised to profit from soaring inflation!
P.S. Right now, successful Americans like us have a bullseye on our back.
We’re facing a direct threat to our safety and prosperity.
The values we hold dear, like individual freedom, hard work and fiscal responsibility have been tossed aside.
The US national debt is growing at an unprecedented rate. And more spending is coming.
The cost of essential goods and services seems to get more expensive by the day. Critical materials are on backorder for months. Grocery store shelves are half-empty.
If you have any money in savings, in the stock market, in a 401k or even cash stuffed under the mattress, this should make the hair on your neck stand up.
To help understand the monumental problem we’re facing and why both our way of life and financial security are under attack, I put together a special presentation.
So, if you want to protect yourself and grow your wealth, I encourage you to watch this video now.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Marathon Oil Corp (MRO)