By Andrey Dashkov, analyst, Casey Research

Andrey Dashkov

The latest inflation number – 9.1% – is the highest one since November 1981.

And energy is almost 42% more expensive than last year.

The market expects the full-year inflation number to average 7.6%. This estimate has been rising steadily since the beginning of 2021. It may be revised upward.

What should investors do?

First, pay attention to the stocks you hold. Not all of them are exposed to inflation the same way.

I will show you in a moment that some companies have become more profitable this year than they were in 2021, despite high inflation.

Others, though, aren’t doing so well.

The key right now is to hold on to the companies that are on top of inflation and review the ones that are vulnerable.

Let’s take a closer look…

Is Inflation Good or Bad for Stocks?

A lot of investors make decisions to buy or sell stocks following the Consumer Price Index (CPI) releases.

But in isolation, high inflation may not mean much for the companies you hold.

And some studies say that inflation can be good for stocks…

That’s because the price consumers pay for goods and services is the revenue the companies selling those goods or services generate.

When prices are higher, companies make more money…

…But only when companies’ costs don’t rise faster than their revenues.

That’s the key difference between the companies doing well and the ones struggling.

So the best way to stay ahead of inflation is to look at each company individually.

You need to focus on gross profit. It’s a profitability measure that deducts the cost of goods sold from revenue.

Gross profit margin, in turn, is gross profit as a share of revenue.

I ran a screen that covered companies listed in North America with a market capitalization of $10 billion or more. Then I compared their latest profitability to what they reported in the first quarter of 2021.

Not all companies suffered from high inflation in the first quarter of 2022.

The average gross margin changed slightly, from 46% in the first quarter of 2021 to 45% in the latest quarter of 2022.

This shows that most larger companies, on average, are handling the high inflation rate quite well.

But not all of them…

Inflation’s Victims and Winners

These five companies became way less profitable in the latest quarter compared to the first quarter of 2021.

           Change in Gross Margin Between 1Q22 and 1Q21  
Ovintiv, Inc. (OVV) -20 pp
NextEra Energy, Inc. (NEE) -23 pp
Brookfield Infrastructure Partners (BIP) -23 pp
Chesapeake Energy Corp. (CHK) -42 pp
Cheniere Energy, Inc. (LNG) -53 pp

Source: Bloomberg

Here’s what might come as a surprise.

All of these companies – except for Brookfield – work in the energy industry.

And their gross margins shrank in the latest quarter.

Even though energy is on everybody’s radar, buying energy stocks wholesale may not be a good idea. Even a brief look under the hood shows that not all of them are reaping massive benefits from rising oil prices.

If you hold any of these stocks, you need to review the reasons why you think they will continue performing well in this environment.

But with losers come winners…

           Change in Profitability Between 1Q22 and 1Q21  
Algonquin Power and Utilities (AQN.TO) +35 pp
Ross Stores, Inc. (ROST) +32 pp
CF Industries Holdings (CF) +32 pp
Occidental Petroleum Corp. (OXY) +30 pp
TJX Companies, Inc. (TJX) +28 pp

Source: Bloomberg

This list is more diverse.

It has energy companies (Algonquin and Occidental), retailers (Ross Stores and TJX), as well as fertilizer manufacturers (CF Industries).

They all managed to increase their gross margins even in this high-inflation environment.

And that’s why I call this market a “stock-picker’s” one.

There are energy stocks that are doing well and ones that aren’t.

Some consumer-goods companies have managed to increase their profitability despite soaring input costs.

So if you look past the grim headlines, you may uncover hidden opportunities the market is overlooking. The list above is a good place to start.

Good investing,


Andrey Dashkov
Analyst, Casey Research