How Stagflation Effects Stocks

Stock-Markets / Stock Market 2021 Dec 05, 2021 - 07:04 PM GMT

My long standing mantra has been that one of the primary reasons to remain invested in AI tech stocks is because they are leveredged to inflation, which on an average basis is true. However when gauging how each individual stock will react to inflation one needs to take key points into consideration such as the stocks valuation where an over valued stock trading on many multiples of the markets average of 20 is going to be finally balanced on a knife edge of future gains vs a bear market where it only takes a small shift in investor expectations to send that stock sharply lower.

Whilst the basic reason why AI stocks are leveraged to inflation is because inflation will inflate their revenues and costs and given that AI stocks are highly profitable then the gap between revenues and costs should expand due to inflation hence are leveraged to inflation.

For example let's take AI Numero Uno Google (Alphabet) :

Total Revenue for 2020 was $182.6bn, vs Total Operating Expenses $141.3bn, resulting in an operating income of $41.3bn. If nothing else changes then the impact of 10% real inflation on 2021 results will be to increase Revenues to $201bn, and Costs to $155.4bn, resulting in a operating income of $45.4bn, up 10% on 2020! And there in lies the leverage impact of inflation on good AI stocks and explains why stocks such as Google are trading at such high multiples! Because even if they did nothing different in terms of generating new revenues profits will still increase by 10% per annum regardless and the higher real inflation goes then so will their profits!

Conversely when we are dealing with a corporation that is not making a profit, i.e. the mis labeled 'growth stocks' the likes of which populate Cathy Woods ARK funds which in large part explains why her funds have performed so badly during 2021, then the effect of 10% real inflation on say one of her primary holdings Teladoc Health is this -

Total Revenue for 2020 was $1.1bn, vs Total Operating Expenses were $1.6bn, resulting in operating income of -$506mln. If nothing else changes then the impact of 10% real inflation on 2021 results will be to increase Revenues to $1.21bn, and Costs to $1.76bn, resulting in a operating income of -$550lm 10% worse than 2020 risking share holder dilution or worse.

And there in lies the problem with so called growth stocks and why I am reluctant to get sucked into the hype that surrounds loss making corporations, which even extends to where my high risk portfolio is concerned, I tend to veer towards corporations that are actually making a profit else expect to be in for a very bumpy ride aka Atea Pharma (ATEA) which is VERY HIGH RISK! We are in effect betting on one of their drugs under development coming good, as is for many of my biotech high risk stock plays. AVIR's revenue for 2020 were $48mln, vs operating expenses of $60mln, resulting in a loss of $11.4 mln, where the losses are financed via share dilution (printing more shares) and that is the risk of investing in such stocks, strike gold or oil before the losses dilute our holdings to zero and hence why it is very high risk.

Whereas AI stocks, i.e.all of the profit generating stocks on my list are LEVERAGED to inflation, the management can screw things up and the stocks will still report an increase in corporate earnings as a consequences of real inflation.

The fundamental rule for long-term investing is that the corporation needs to have a track record of delivering earnings growth, else it is high risk and thus one should tread carefully, and understand that it is high risk. Which is why I am reluctant to buy back into Amazon because the spread between Amazon revenues and costs is mighty thin just 6% vs Google's 29%. Conversely it's why I am far more eager to buy back into Apple then any of the stocks I sold out of that stands at a whopping 40% spread!

Meanwhile we all got to pile into Intel at sub $50 a share as the clowns on Wall Street made a huge mistake in giving us all a 15.5% discount on where the stock was trading pre earnings report, guess where Intel stands on this important metric? 43%! BETTER than that of Apples 40% and Google's 29%. Why I tripled my holding on a PE of just 9.5 against the others on typically near 30! Buying Intel today is a no brainier. It should be my largest holding! Obviously one needs to balance the risks of something unexpected happening so I am wary of Intel going much above 5% of my stocks portfolio, but still it is the best stock to buy right now and why I tripled my holding on it's break below $50.

So Intel, Apple, Facebook, TSMC and so on are great stocks that are LEVERAGED to inflation, Amazon not so good, whilst Nvidia has departed this world for another planet.

However note where high inflation is concerned with say a CPI rate of over say 7% (real would be double that) then it's a case of limiting the damage done, rather than having real terms double digit gains as has been the case for several years in which case valuations really do matter, as price earnings multiples will fall to levels we have not been used to for decades. So all those hodling Amazon, Nvidia and such like should bare that in mind.

Whilst the best stocks to be invested in during inflationary periods are the low P/E cash cows such as those that populate the energy sector. I hold just one oil stock BP, and have no plans to go down this route. And of course PHARMA stocks should do well in relative terms.

This analysis is an excerpt from my recent extensive analysis - AI Tech Stocks Portfolio Updated Buying Levels and Zones as Financial Crisis 2.0 Continues Brewing

Contents:
Financial Crisis 2.0 Checklist
The China Syndrome
Stock Market Begins it's Year End Seasonal Santa Rally
Stock Market Trend Forecast Current State
INVESTING LESSON - BUYING VALUE
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock
INVESTING LESSON - Give your Portfolio Some Breathing Space
How Stagflation Effects Stocks
INTEL Bargain - 15.5% Discount Sale
Why Intel stock price dropped 15%?
FACEBOOK - 10% DIscount
IBM - 20% Discount
Amazon - 5% Discount
APPLE 4% Discount
AMD $136 on Route to $200
TSMC - $117
Microsoft $336
Google $2980, PE 28.7, EC 30.
Nvidia Leaves planet Earth - $299, PE of 106
Heads Up on NEW Potential Tech Stocks
AI Stocks Portfolio Updated Buying Levels
AI Stocks Buying Plan B
FREE TRADE the Perfect Stocks and Shares ISA?
FREE SHARE FROM FREETRADE
High Risk Stocks Brief
Crypto's 20% Discount Event
Bitcoin Trend
Palladium Brief

The whole of which was first been made available to Patrons who support my work. So for immediate first access to ALL of my analysis and trend forecasts then do consider becoming a Patron by supporting my work for just $4 per month. https://www.patreon.com/Nadeem_Walayat.

Also access to my recent analysis that maps out what I expect to happen during the next big crypto bull market is only just beginning for most crypto's

Bitcoin NEW All time High is TRIGGER for Future Alt Coins Price Explosion

Contents:

Bitcoin & Ethereum 2021 Trend
Crypto Portfolio Current State
The BITCOIN NEW ALL TIME HIGH Changes EVERYTHING!
Ravencoin to the MOON!
What am I doing?
How to Invest in Crypto's
Bitcoin 2022 Price Target
Ethereum 2022 Price Target
Ravencoin 2022 Price Target
Cardano (ADA) 2022 Price Target
Chainlink 2022 Price Target
Pokadot 2022 Price Target
Solano 2022 Price Target
Litecoin 2022 Price Target
Arweave 2022 Price Target
Stellar Lumens - XLM 2022 Price Target
Eth Classic 2022 Price Target
Vechain 2022 Price Target
EOS 2022 Price Target
Earnings Noise Delivers INTEL And IBM Buy Opps
Facebook and Google Could CRASH 10% Post Earnings Day
High Risk Stocks Swings and Roundabouts

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And access to why inflation will be far from transitory, batten down the hatches for what's to come-

Protect Your Wealth From PERMANENT Transitory Inflation

Best Real Terms Asset Price Growth Countries for the Next 10 Years
Worst Real Terms Asset Price Growth Countries for the Next 10 Years
The INFLATION MEGA-TREND
Ripples of Deflation on an Ocean of Inflation!
Stock Market Trend Forecast Current State
US Dollar - Stocks Correlation
US Dollar vs Yields vs Dow
Stock Market Conclusion
34th Anniversary of the Greatest Crash in Stock Market History - 1987
Key Lesson - How to REALLY Trade Markets
AI Stocks Portfolio Current State
October Investing Plan
HIGH RISK STOCKS INVEST AND FORGET PORTFOLIO
Can US Save Taiwan From China?

And my extensive analysis of Silver concluding in a trend forecast into Mid 2022.

Silver Price Trend Forecast October 2021 to May 2022, CHINOBLE! AI Stocks Buying Plan

UK Inflation Soaring into the Stratosphere, Real rate Probably 20% Per Annum
The 2% Inflation SCAM, Millions of Workers take the Red Pill
Silver Previous Forecast Recap
Gold Price Trend Implications for Silver
Silver Supply and Demand
Silver vs US Dollar
Gold / Silver Ratio
SILVER Trend Analysis
Long-term Trend Analysis
Formulating a Trend Forecast
Silver Price Trend Forecast October 2021 to May 2022
Silver Investing Strategy
SIL ETF - What About Silver Mining Stocks?
Gold Price Trend Brief
Why the CCP is Living on Borrowed Time and Needs a War
Understanding the Chinese Regime and What it is Capable Of
Guanxi
Chinese People do NOT Eat Dogs Newspeak
CHINOBLE! Evergrande Reality Exposes China Fiction!
AI Stocks Portfolio Investing Strategy
AI Stocks Portfolio Amendments
AI Stocks Portfolio Current State
October Investing Plan
HIGH RISK STOCKS INVEST AND FORGET PORTFOLIO
Why China Could Crash Bitcoin / Crypto's!
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How to Profit from the Metaverse
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Nadeem Walayat

http://www.marketoracle.co.uk

Nadeem Walayat has over 35 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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