Inflation worries are picking up, and the stock market is down in consequence. Inflation-sensitive stocks, especially the tech giants, have slipped in recent trading sessions, as government bond yields ticked higher.
Unsurprisingly, the factors behind the inflation worries are directly related to the pandemic situation. There’s the massive fiscal stimulus of the legislative COVID relief packages, that are helping to fuel that inflationary pressure, but there is also the ongoing vaccination program that continues to reach more than 1 million people per day, and holds out the promise of a return to more normal conditions.
So the question now is, what should investors do?
For the near-term, at least, the chance of inflation outweighs the positive news about the receding COVID epidemic is real. With that in mind, Wall Street pros advise looking at ‘inflation-resilient’ sectors.
Using the TipRanks database, we identified two stocks that, according to top-rated analysts, could potentially gain should inflation take hold. In fact, both have received overwhelmingly bullish praise from the Street, enough to earn a “Strong Buy” analyst consensus.
Applied Materials (AMAT)
We’ll start with a producer of technological goods, Applied Materials. Like any manufacturer, Applied Materials can survive in an inflationary environment; as the cost of raw materials rises, the company will pass those on to its own customers through higher prices on finished products. No one likes that, but the company’s products are essential in the tech industry. Applied Materials makes integrated circuit chips for electronic devices; flat panel displays used in TVs, computer monitors, smartphones, and tablets; and coatings for flexible electronics. AMAT brings in over $17 billion in annual revenue, has over 14,000 patents, and puts more than $2.2 billion annually into R&D work.
In its recent quarterly report, for fiscal 1Q21, Applied Materials reported a top line of $5.1 billion, up 24% from the prior year, and earnings of $1.22 per share. EPS was flat sequentially, but up 27% year-over-year.
These results came in as the company’s stock has registered strong gains. AMAT shares are up 101% in the past 12 months, far outpacing the broader markets. The gains reflect increased demand for the company’s products due to the increase in telecommuting, virtual offices, and remote schooling.
In his note on Applied Materials, B. Riley’s 5-star analyst Craig Ellis takes an upbeat stance.
“We believe takeaways affirm a bullish thesis and suspect Street FY21&22 EPS will move materially higher despite retaining sizeable IT/LT upside… Semi’s sales led 1Q’s upside though all segments exceeded our forecast, and we believe robust strength will persist deep into CY21… AMAT’s $70B+ CY21 industry view surprise higher, surpassing close peers… directionally pointing to our +$72-$74B view,” Ellis noted.
To this end, Ellis rates the stock a Buy, and his $150 price target implies a 30% upside potential for the coming year. (To watch Ellis’ track record, click here)
Overall, there are 22 recent reviews on Applied Materials, and no fewer than 19 are to Buy. The remainder are Holds; the analyst consensus view on the shares is a Strong Buy. AMAT is priced at $115.44 and the $133.95 average price target suggests 16% upside from that level. (See AMAT stock analysis on TipRanks)
Next up, Citigroup, is of the US’ Big Four banking institutions. For banks like Citi, which are net lenders, inflation’s tendency to push up interest rates is a boon. Long term, higher rates will increase loan profitability faster than inflation will eat away at repayments. In that environment, the banking sector could outperform the S&P 500 over the long term, should inflationary tendencies drive up key interest rates.
In the meantime, a look at Citi’s current situation shows that revenues and earnings are still down year-over-year, although EPS has shown strong sequential gains. In 4Q20, the bank reported a top line of $16.5 billion, down 10% yoy, and EPS of $2.08. The earnings were down 3% yoy, but up 48% from Q3.
5-star analyst Chris Kotowski, of Oppenheimer, advises investors to keep an even strain despite the year-over-year losses.
“Our advice to investors is to take a deep breath, look at the numbers and see they were all basically in line and that the outlook is really not much changed from where it was previously… we are staying with the expectations for a significant wave of loan losses in 2H21E outlined in our preview [but] we think the strong likelihood is that this will prove way too conservative, and returns will normalize in 2022E,” Kotowski opined.
In line with his optimistic approach, Kotowski rates C shares an Outperform (i.e. Buy) along with a $114 price target. Investors stand to pocket a 62% gain should the analyst’s thesis play out. (To watch Kotowski’s track record, click here)
Overall, their is broad agreement on Wall Street about the fundamental quality of the stock. Citigroup’s Strong Buy consensus rating is based on 12 Buy and 3 Hold. C is selling for $70.38 and the $79.80 average price target suggests an upside of ~13% on the one-year time horizon. (See Citi’s stock analysis at TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.