Five Stocks to Buy for Profiting from Inflation in 2022

Paul Dykewicz

Five stocks to buy for profiting from inflation during 2022 are aligned with key investment themes that should help to fuel their performance. 

The five stocks to buy share characteristics of high quality, inflation-protected dividend yield, value rather than growth, free cash flow (FCF) generation and more, according to BofA Global Research. Other factors that led to their recommendation include fund positioning, the investment firm’s analysts’ 2022 earnings outlook versus consensus forecasts, as well as other catalysts.

Each of the five stocks also received “buy” ratings from equity research analysts at BofA Global Research. In addition, these five stocks are mostly neglected by active funds and benefit more from inflation, rising interest rates, heightened gross domestic product (GDP), increased oil prices and wage growth, compared to an equal-weighted 11 sector portfolio.

Five Stocks to Buy for Profiting from Inflation 

The market’s traditional “January Effect” that gives a boost to stocks ended with the Jan. 4 session. That effect reflects the market’s tendency to rise during the last five trading days in December and the first two days that the market is open in January.

“It has not disappointed as the Dow and S&P have traded to new all-time highs, while the Nasdaq is near its high and the Russell 2000 is working on re-taking its 200-day moving average, Bryan Perry wrote in the weekly update to his Cash Machine newsletter subscribers. “It is a very good start when bonds are selling off and cyclical stocks lead, as it implies strong gross domestic product (GDP) growth ahead.”

Paul Dykewicz interviews Bryan Perry, who heads the Cash Machine newsletter, as well as the Premium Income, Quick Income Trader, Breakout Profits Alert and Hi-Tech Trader trading services.

Pension Chief Favors Fund With Five Stocks to Buy for Profiting from Inflation

“Stocks can be inflation hedges, but not all stocks,” said Bob Carlson, who heads the Retirement Watch investment newsletter. “Companies that have stable sales and pricing power offer the best inflation protection. Good inflation hedges among stocks include consumer staples, health care and a number of infrastructure companies. Of course, real estate investment trusts often are good inflation hedges and did very well in 2022.”

A good diversified mutual fund to use as an inflation hedge is Oakmark (OAKMX), continued Carlson, who serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. The fund focuses on stocks selling below their intrinsic values and is a top performer in its category for most periods, he added.

Pension fund and Retirement Watch chief Bob Carlson answers questions from columnist Paul Dykewicz.

Oakmark is up 5.18% in the last month and 4.17% for the past three months, Carlson said. The fund owns only 51 stocks, and 31% of the holdings compose its 10 largest positions. Roughly 37% of the fund is in financial services companies, which should do well as interest rates increase, Carlson counseled.

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Borg Warner Gains Place Among Five Stocks to Buy for Profiting from Inflation

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BofA’s top pick in the consumer discretionary sector is Borg Warner Inc. (NYSE: BWA), a beneficiary of inflation and capital expenditures. The investment firm describes the stock as high quality and fortified by strong free cash flow.

Borg Warner, an Auburn Hill, Michigan-based automotive supplier, employs roughly 50,000 people and has operations in 24 countries. BofA has given a $55 price objective to Borg Warner.

However, BofA wrote in a recent research note that its top buys for 2022 should be held through the full calendar year. The catalysts expected to drive the performance of each are not likely to be fleeting.

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Wells Fargo Ranks Among Five Stocks to Buy for Profiting from Inflation

BofA’s favorite financial stock to buy in 2022 is Wells Fargo (NYSE: WFC), a high quality, value purchase that offers positive prospects in the face of inflation, increased GDP and interest rate betas. San Francisco-based Wells Fargo received a $60 price target from BofA, which called the valuation in line with the bank’s peer average.

Risks to attaining the price objective are an economic slowdown, elevated expense trajectory and slower-than-expected resolution of its consent orders with banking regulators. To outperform the price target of BofA for the bank, potential catalysts could include better-than-expected credit quality, i.e., loan losses and material expense management that improves future earnings.

“Our conversations with investors suggest some concern around franchise attrition the longer Wells is required to operate under the asset-cap,” BofA wrote. “The path to stock outperformance is not straightforward, but at the current valuation, we see the risk/reward skewed to the upside.”

Wells Fargo appears better positioned to benefit more from higher rates than other banks, BoA opined.

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Eaton Corp. Leaps in to Five Stocks to Buy for Profiting from Inflation

Eaton Corp. Plc (NYSE: ETN), a Dublin, Ireland-based diversified power management company, is BofA’s top-ranked industrials stock for 2022, offering positive inflation, GDP and oil price betas. The stock also is a capital expenditure and manufacturing reshoring beneficiary, BofA noted.

Eaton Corp. gained a buy recommendation from BoA and has been in operation for more than 100 years. Its business units include electrical products, electrical systems and services, aerospace, vehicles and, most recently, e-mobility.

Eaton’s mission is to improve the quality of life and the environment by using power management technologies and services. The company provides sustainable solutions to help its customers effectively manage electrical, hydraulic and mechanical power safely, efficiently and reliably. Eaton sells products to customers in more than 175 countries.

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BofA gave Eaton a $195 price objective based on the investment firm’s 2022 estimates. The valuation of Eaton is at a slight premium to the company’s peer average, but the valuation is warranted due to expected upside from cyclical operating leverage, strong margin performance and Eaton’s less cyclical portfolio mix, BoA added.

Downside risks to BoA’s price target for Eaton are a worse-than-expected global industrial recession, especially in commercial construction, and mergers and acquisitions that require the availability of synergistic targets and the ability to integrate them. Another risk to watch is the trajectory of the recovery in automotive and aerospace end markets.

F5 Flies Among Five Stocks to Buy for Profiting from Inflation

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Seattle-based F5 Networks (NASDAQ:FFIV) is the preferred information technology stock recommended by BofA for 2022. BofA found that F5 offers positive betas versus inflation, GDP and interest rates.

F5 Networks produced a potent performance in fiscal fourth quarter and the fiscal year ended September 30, 2021. François Locoh-Donou, F5’s president and chief executive officer, said the company’s strong fourth-quarter results cap a year of robust financial strength. With software revenue representing 45% of product revenue in the fourth quarter, and 80% of this software revenue from subscriptions, F5 is achieving milestones in its rapid transformation to a software-led business model, Locoh-Donou said.

“Skyrocketing application usage and heightened security awareness are driving strong demand for F5 solutions on premises, in the cloud and across multiple clouds,” Locoh-Donou said. “Expanded solutions portfolio and vision for enabling Adaptive Applications puts F5 at the intersection of strong and sustainable secular trends and positions the company for continued strong revenue and earnings growth.”

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NRG Energy Gains Berth Among Five Stocks to Buy for Profiting from Inflation 

Houston-based NRG Energy, Inc. (NYSE: NRG) is an energy company that formerly operated as the wholesale arm of Northern States Power Company, a precursor to Xcel Energy. NRG Energy is BofA’s current favorite among utilities with positive inflation and GDP betas. The stock also screens well on the investment firm’s Alpha Surprise and DDM Alpha models.

On Dec. 6, 2021, NRG Energy Inc. closed its previously announced sale of approximately 4,850 MWs of fossil-generating assets from its East and West regions to Generation Bridge, an affiliate of ArcLight Capital Partners. Upon closing, NRG received $620 million of net proceeds, after purchase price adjustments. The transaction is expected to be leverage neutral with $500 million of the net proceeds allocated to deleveraging.

After closing the asset sale, the NRG Board of Directors authorized $1 billion for share repurchases, effective immediately. The program is expected to continue throughout 2022.

“Closing this transaction further advances our strategic priorities of decarbonizing our portfolio while aligning our business with the evolving needs of our customers,” said Mauricio Gutierrez, NRG’s president and chief executive officer. “We remain focused on advancing the strategic priorities we outlined during our June 2021 Investor Day, including executing on our free cash flow per share growth roadmap and maintaining a strong balance sheet to create significant value for our stakeholders.”

Under the share repurchase authorization, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, in accordance with the rules of the Securities and Exchange Commission and other applicable legal requirements. The timing and amount of any shares of NRG’s common stock that are repurchased under the share repurchase authorization will be determined by NRG’s management based on market conditions and other factors. 

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America Tops 1 Million New Cases for the First Time on Jan. 3

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The United States topped 1 million new coronavirus cases for the first time on Monday, Jan. 3. The total of roughly 1.08 million people likely was enhanced by people delaying testing for the virus amid holiday weekend celebrations.

The new high nearly doubled the previous peak of 591,000 of new COVID-19 cases set last Thursday, Dec. 30. The holiday season of 2021 marks the second straight year that COVID-19 has interfered with the travel plans of families and their friends seeking to gather. Thousands of flights already have been cancelled due to rising COVID cases, as many workers at airlines, airports and related retailers call in sick.

Scientists have found that the new Omicron variant of COVID-19 is spreading much faster than the highly infectious Delta variant. However, the severity of the Omicron variant, compared to Delta version, does not seem nearly as severe, according to early studies.

Omicron recently has become the dominant variant of COVID-19 in the United States by far. That version of the coronavirus is blamed for causing Mid-Atlantic areas such as Washington, D.C., Maryland and Virginia to shatter records for daily cases. Many other regions are reporting new highs for COVID-19 cases, too. 

COVID-19 Concerns Mount Along With Cases and Deaths

The Omicron variant of COVID-19 and the Delta version are heightening concerns in the United States and other parts of the world. Public health experts and government leaders advocate increased vaccinations and booster shots, as well as indoor mask wearing.

The Centers for Disease Control and Prevention (CDC) reported that the variants are boosting the number of people receiving COVID-19 vaccinations. But nearly 62 million people in the United States remain eligible to become vaccinated but have not done so, said Dr. Anthony Fauci, the chief White House medical adviser on COVID-19.

As of Jan 5, 244,947,293 people, or 73.8% of the U.S. population, have received at least one dose of a COVID-19 vaccine, the CDC reported. People who are fully vaccinated total 206,581,659, or 62.2% of the U.S. population, according to the CDC.

COVID-19 deaths worldwide, as of Jan. 5, topped the 5.4 million mark to hit 5,457,484, according to Johns Hopkins University. Worldwide COVID-19 cases have zoomed past 295 million, reaching 295,222,031 on that date.

U.S. COVID-19 cases, as of Jan. 5, hit 57,048,800 and caused 830,071 deaths. America has the dubious distinction as the country with the most COVID-19 cases and deaths.

The five stocks to buy for profiting from inflation in 2022 are recommended by BofA to purchase and hold for the full year. Investors willing to follow that lead may find most of them fulfill their expected promise.

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