The Best Stocks to Own When Inflation Absurdity Strikes

Inflation almost sent me biking across California wine country...

I recently turned up at Avis in Santa Rosa to rent a car for the weekend. I'm a regular customer there, so I'm familiar with the typical rental costs.

Of course, this year has been anything but typical. Normally, it would cost me $800 to rent a car for an entire month. This time, I was quoted $800 just for the weekend.

I ended up paying much less, thanks to my status as a longtime customer. But if I hadn't been... well, lucky thing I can still ride a bicycle, because I wasn't about to pay that price.

Then it was time to fly home. Two years ago, a business-class flight from California back to the East Coast would cost me anywhere from $500 to $600. But it's different now. These prices were just around $2,000. I even saw one for $3,200. It's insane.

Once again, I was fortunate... I was able to push my flight to another day and pay a lot less. But some people have no choice but to pay these absurd prices.

This isn't just a story of wacky things I saw on my vacation. Prices are rising everywhere...

Home prices are up 17% over the past year. Used-car prices have increased 32%. Gas prices are up roughly 50%.

You've seen headlines about these increases, I know. But did you know the price of electricity is 5% higher than a year ago? And have you heard that a gallon of milk costs 5% more than last year?

These are real price increases that affect real people... And they will hit you especially hard if you are retired and living on a fixed income.

Take a look at the chart below of the Core Consumer Price Index ("CPI"). Core CPI takes out volatile food and energy prices. You can see the dramatic spike in inflation...

Some folks are terrified of these rising prices... They think we're on the brink of 1970s-style inflation – a significant, long-term problem that will severely devalue Americans' savings.

Others, including Fed Chair Jerome Powell, see today's inflation as "transitory." In other words, it's a temporary price recovery from a wonky 2020.

But whichever camp you fall into, one thing is clear...

Thanks to record government stimulus and a recovering economy, inflation is here today. And while the Fed has made noises about raising rates down the road, it still isn't in a hurry to cool it. That means we could be looking at higher prices for the foreseeable future.

And folks increasingly believe this inflation could be significant. Take a look at the New York Fed's national consumer survey... While people do expect unusually sharp inflation this year, they're also expecting a higher rate over the next three years.

So what should investors do in today's environment?

When inflation strikes, you want to own hard assets like gold or real estate.

Some stocks can also do well during inflation...

A good business can raise prices to offset inflation. If you have highly demanded products and happy customers, you can charge a bit more to cover rising costs like wages or raw materials.

Most stocks like this are considered value stocks. A value stock typically makes a lot of money today relative to its market value. These kinds of companies don't have expectations of high double-digit revenue growth in the future, and that's often why they're priced cheaply.

Growth stocks, on the other hand, are priced expensively relative to what they earn today. That's because the market expects them to earn a lot more money in the future.

When inflation strikes, a growth stock's future revenue isn't so valuable anymore... That's the entire point of inflation: $1 in 10 years looks a lot less attractive than $1 today.

So with the inflation we're seeing today, look for quality businesses that can raise prices... and be wary of stocks counting on future growth.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: In 2020, we witnessed the fastest stock market crash in history... followed by the fastest rally the world has ever seen. If you're worried that another full-blown financial meltdown is on the way, you're not alone... So on September 28, our firm's greatest bulls and bears are sitting down for a no-holds-barred discussion of what they see coming – including the No. 1 greatest threat to your wealth today. Click here to learn more.

Further Reading

"Nothing outperforms forever," Dan Ferris says. And even though growth stocks can't boom indefinitely, that doesn't mean you have to get out of stocks altogether... Check out Dan's two-part essay about how to outperform the market when the trend finally shifts away from growth stocks here and here.

"You don't get wealthy by bold predictions or a quirky financial product," Doc writes. Instead, it pays to be a little bit right every day and stack up those correct decisions over time... Read more here: A 'Magic Ticket' to Wealth... Or to Financial Disaster.

Market Notes
BUSINESS IS BOOMING FOR THIS 'BORING' AUTO-PARTS RETAILER

Today’s company isn’t exciting… and that’s just fine by us.

Regular readers know that a business doesn’t have to be “sexy” or the newest hot stock to be a solid performer. “Boring” businesses can have some of the most reliable, steady gains. Today’s company has a simple, straightforward business that’s been fulfilling a need for years…

O’Reilly Automotive (ORLY) is a $43 billion leader in the aftermarket auto-parts industry. With more than 5,700 stores in the U.S. and Mexico, it sells everything from brake pads to mechanic tools to WD-40. And business is booming… In the most recent quarter, O’Reilly reported comparable store sales up 9.9% over the same period last year. And diluted earnings per share increased 17%, from $7.10 to $8.33 year over year.

As you can see, ORLY shares are in a strong uptrend. They’re up nearly 200% in the past four years, recently hitting new multiyear highs. And as O’Reilly continues to focus on its simple business model, that trend should continue…