Summary
- The U.S is entering a period of stagflation reminiscent of the 1970s.
- Commodity stocks perform well in stagflation.
Since last year, the prospect of stagflation has been on the horizon. Now, it is a fact that we are in a stagflation economy. Stagflation occurs in an economy when inflation is on the increase, but economic growth is slowing down. The U.S economy had a 5.7 growth in 2021, but recent geopolitical events in Ukraine and rising gas prices will halt that admirable 2021 result in 2022. The U.S inflation rate is now 7.5%, but analysts say it will increase further to 10% this year if the Fed doesn’t act fast. Present events are reminiscent of what happened in 1970 when we had the last stagflation.
During the 1970s to early 1980s, there were skyrocketing oil prices and inflation rose steeply to double digits. To make matters worse, unemployment increased at that period to 10.8%. As a result, there was a broad selloff in the stock markets, with the S&P 500 losing half of its value. We are seeing a repeat of that performance this year. Last year, the U.S inflation was 7.0% but in the first quarter of this year, it has risen to 7.5%. Analysts also say that economic growth will be slowed due to several factors, including supply chain constraints. To add to the mix, the Russian-Ukraine conflict will make matters worse. As a result, many analysts predict that GDP growth will fall to 3.5% this year.
To the savvy investor, there is the question of what stocks perform best in a stagnating environment.
I will highlight two commodity stocks that will give you great rewards when we have stagflation.
B2Gold Corporation (NYSE: BTG)
B2Gold (NYSE: BTG) is a Canadian mining company with headquarters in Vancouver, British Columbia. The company operates gold mines in Mali, Namibia, and the Philippines. Its reserves and development activities are spread across several locations worldwide. Stagflation makes gold bullish due to a weak economy and high inflation. Real rates become very low, and gold becomes attractive to investors. Many persons see gold as a hedge against inflation because it has a low carrying cost. Gold stocks like B2Gold are the best stocks against stagflation.
B2Gold is among the gold producers with the lowest cost per ounce. In 2021, it produced 1.0 million ounces of gold with a low cost of production of $888 per ounce. So investors flock to this stock when gold becomes bullish. B2Gold projects producing 1.1 million ounces of gold in 2022, costing $1,010 to $1,050 per ounce. It projects $1.8 billion in revenue and earnings per share of 38 cents for shareholders. The dividend yield is 3.8%.
With a pretty good dividend payout, BTG is a great stock to keep right now.
Vale (NYSE: VALE)
Vale (NYSE: VALE)supplies iron ore and iron ore pellets to the steel industry. It is the world’s largest producer of nickel, iron ore, and iron ore pellets. Infrastructure spending and construction expenditures will rise over the coming decade, making Vale stock increase in value because its products are used extensively in these industries. Vale also produces manganese ore, copper, metallurgical and thermal coal, and ferroalloys.
The company produces at one of the lowest costs because it has good logistics that integrates railroads, ports, and ships. There is a strong demand for nickel used to produce electric vehicles. Copper prices are also at an all-time high. The company has strong fundamentals in the market.
Among stagflation stocks, Vale(NYSE: VALE) is one of the most solid choices. It has outperformed in previous inflationary environments and will continue to do so. Its 2021 revenue stood at $54.5 billion, which was a 35% increase, and earnings per share were $4.47, which was a growth of 371% year over year. Forecasted revenue for 2022 is $45.9 billion with $3.08 as earnings per share.
Vale is a quality stock that should be in your portfolio in this stagflation environment.
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