There are increasing concerns that the economy could enter into a period of stagflation.  Stagflation occurs when economic growth slows at the same time inflation levels rise. Currently, there are concerns that economic growth will be negatively affected by the increase in coronavirus cases and inflation is rising at its fastest pace since 2008.

This would be disastrous for consumers and businesses and would lead to underperformance of stock prices. The last time the US encountered stagflation was in the 1970s, when inflation was elevated due to the Arab oil embargo, the Bretton-Woods agreement which severed the connection between the dollar and gold, and an increase in fiscal deficits due to the expansion of the welfare state and the Vietnam War. 

There are some parallels from the period of stagnation during the 1970s to the economic conditions we’re seeing today: the Fed is still aggressively injecting liquidity into markets, we’re seeing record fiscal deficits, and we face the continued challenge in dealing with the coronavirus. Investors who are concerned about stagflation returning should consider buying the 3 following stocks: Gold Fields (GFI), ConocoPhillips (COP), and Google (GOOGL).

Gold Fields (GFI)

Based in South Africa, GFI explores for, extracts, processes, and smelts gold and copper at properties in South Africa, Ghana, Australia, and Peru. It holds interests in nine operating mines with an annual gold-equivalent production of 2.24 million ounces, along with gold mineral reserves of approximately 52.1 million ounces and mineral resources of 116.0 million ounces.

High-quality gold miners like GFI would certainly outperform in a stagflationary environment. During such a period, real interest rates would certainly trend lower as the government would be stimulating the economy from a fiscal and monetary perspective. Additionally, inflation rates would put downward pressure on real rates as well. Therefore, gold would certainly outperform in this scenario.

This is evident in the 1970s as gold was one of the best-performing assets. In 1971, gold was worth $35 per ounce. By January 1980, it was over $800 per ounce. GFI would thrive with rising gold prices as it would be more profitable and the value of its holdings would rise as well. 

GFI’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary ratings system. B-rated stocks have posted an average annual performance of 19%. To see more of GFI’s POWR Ratings, click here.

ConocoPhillips (COP)

COP is one of the world’s largest independent companies in the exploration and production of oil and natural gas. The company engages primarily in the operation of conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. Its operations are spread across 15 countries.

As a diversified oil producer and services company, COP is well-positioned to thrive in a stagflationary environment. The company would benefit from increasing energy prices for obvious reasons. On top of that, companies with large amounts of capital equipment also outperform in inflationary environments as the value of these assets increase. 

Further, COP is quite attractive from a valuation perspective. COP has a forward P/E ratio of 12. Even more intriguing is that COP is expected to generate $10 per share in free cash flow in 2021 which equates to about 16% of the market cap. This implies that the company should be increasing its dividend or share buybacks. 

COP’s POWR Ratings are consistent with this bright outlook as it’s rated a B which translates to a Buy. In terms of its component grades, COP has an A for Momentum and Stability. To see the additional component scores for COP including Growth, Value, Sentiment, Quality, and Industry, click here.

Google (GOOGL) 

As the leading company in online search, GOOGL would also outperform in a stagflation environment. The company has a wide and deep moat around it which means its margins aren’t subject to erosion like other companies. Further, it has leading positions in many fast-growing parts of the economy like cloud computing, AI, autonomous vehicles, and streaming video. These industries are likely to grow even during adverse economic conditions like computers or semiconductors in the 1970s.  

However, the major factor is that the Internet would continue to grow, and Google Search remains the primary way that people navigate the Internet. Thus, its revenues would keep growing over long periods of time. Further, it would be able to raise prices along with inflation given that it’s essentially a monopoly. 

The last decade has shown us that (secular) growth stocks outperform when economic growth is low, and interest rates are low as well. It means that companies that will reliably grow and compound revenues tend to see multiple expansion as parts of the economy that are more connected to economic growth experience revenue losses.   

Currently, GOOGL has been on fire in terms of the performance of its business, and its stock prices. In its last quarter, revenue increased 61.6% year-over-year to $61.9 billion. The company’s income from operations has been reported at $19.36 billion, representing a 203.3% year-over-year improvement. GOOGL’s net income came in at $18.53 billion, up 166.2% from the prior year period. Its EPS increased 169.1% year-over-year to $27.26. As of June 30, 2021, the company had $23.63 billion in cash and cash equivalents.

Given this strong performance and outlook, it’s not surprising that the stock has an overall B rating, which equates to a Buy in our proprietary rating system. In terms of its component grades, it has an A for Sentiment and a B for Quality. To see more of GOOGL’s POWR Ratings, click here. 

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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com.  Jaimini has been dialed into the hottest trends in investing:

• Electric Vehicles
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• Genomics
• And Much More

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GOOGL shares . Year-to-date, GOOGL has gained 56.56%, versus a 19.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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