Inflation has turned into quite a sticky problem. At first, economists had assumed that the recent inflation spike was primarily driven by the pandemic and related shocks. The problems with supply chains, labor availability and others were supposedly just a blip rather than a structural change in the economy.
Many economists used the word “transitory” to describe how inflation was going to be a quickly passing event. But Russia’s invasion of Ukraine prolonged the inflationary surge as the prices of agricultural goods, oil and other commodities skyrocketed.
Fast forward to 2024, and fresh geopolitical tensions have appeared, this time in the Middle East. Meanwhile, with the U.S. economy remaining strong, it’s far from certain that price inflation is set to decline to the Federal Reserve’s target anytime soon.
Recently, Fed Chair Jerome Powell said that that the committee is not satisfied with where inflation is today, and that interest rates may need to remain higher for longer until inflation is reined in. This cast cold water on the idea that there will be imminent Federal Reserve interest rate cuts.
With this in mind, investors should prepare for the possibility that inflation isn’t actually transitory. If inflation drags on for quite a while, these are three stocks that can still deliver the goods in a rising price environment.
Franco-Nevada (FNV)
Franco-Nevada (NYSE:FNV) is one of the world’s leading precious metal royalty companies. The idea is it provides funding to mining companies for new gold, silver, copper and other such projects when they’re being built.
In return for the upfront funds, Franco-Nevada receives a royalty arrangement from the mine owner. Franco-Nevada earns some portion of the mine’s future metal output once it starts commercial production.
Over the decades, Franco-Nevada has built highly diversified revenue stream. It obtains metals from hundreds of mines and natural resource assets. The value of this resource portfolio should be apparent in a highly inflationary economic environment. That’s because gold and silver tend to appreciate, serving as inflation hedges during uncertain times.
The price of gold has hit new all-time highs this year. Adding to this backdrop, political tensions, particularly in the Middle East, are often a catalyst for higher gold and silver prices as well.
Despite the favorable macroeconomic situation, FNV stock is selling way below its 52-week highs.
This is because one of the company’s largest royalty deals in Panama was disrupted, due to political disagreements around that mine and production is temporary paused. It remains to be seen how this will play out, but either the mine is likely to reopen or Franco-Nevada should receive compensation from the international arbitration process.
Notably, Panama just had its presidential election and elected a conservative who is likely to take a favorable view toward the mine.
Upside from the Panama situation is icing on the cake for this leading royalty company. More broadly, FNV stock is benefiting from the inflationary environment and the sharply higher prices of gold and silver this year.
Canadian Natural Resources (CNQ)
Canadian Natural Resources (NYSE:CNQ) is one of Canada’s largest publicly-traded companies. The firm has built its business over the decades by developing and acquiring oil producing assets in Canada.
Moreover, it has focused on the Alberta oil sands. These assets have highly attractive economics because they have long reserve lives. In fact, oil sands function more like hard rock mining as opposed to oil wells.
That is to say that once an oil sands operation is up and running, there’s virtually no decline rate. This constant production compares favorably to production techniques such as fracking, which tend to see massive year-over-year declines in production.
The value of these long-life oil sands reserves has increased, due to political and environmental constraints. It’s becoming increasingly difficult to permit and build new oil production in developed countries.
By contrast, Canadian Natural Resources has assets that are currently being produced and can run into the 2040s and then some cases even 2050s. This insulates the company from environmental opposition and shelters it from future inflation concerns, as the assets are already built and operational today.
With the company’s bountiful low-cost oil production assets, CNQ stock is set to shine as inflation and geopolitical pressures send energy prices higher.
Hershey (HSY)
Hershey (NYSE:HSY) falls within another category of companies that can prosper during inflationary conditions — the consumer staples companies anchored by powerful brands. These companies have historically demonstrated a great deal of pricing power through various economic cycles.
Typically, when people go to the store, they are willing to pay a little more for everyday low-cost purchases such as food, beverages and cleaning products.
Chocolate is a perfect example.
A lot of consumers have a strong connection to their favorite type of candy or chocolate bar. They are loathe to switch brands, and generally folks shun cheaper store brand alternatives altogether.
In practice, this means that Hershey and its handful of global rivals have exceptionally strong pricing power and consumer lock-in. These are invaluable traits during a volatile and inflationary economy.
Hershey stock slumped over the past year, in large part due to a sudden and profound surge in the price of cocoa beans. Cocoa prices tripled between 2023 and April 2024.
However, the cocoa shortage appears to be ending, as prices have slid more than 25% from their recent peak. Hershey also reassured investors that it is well-situated to ride out the current cocoa volatility.
Many traders are still perceiving HSY stock as being at risk from commodity prices. In all likelihood, however, Hershey will benefit from both falling cocoa prices and its own ability to rapidly increase chocolate and candy prices during inflationary times. This should lead to a delectable outcome for Hershey shareholders.
On the date of publication, Ian Bezek held a long position in HSY, CNQ and FNV stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
