Are you worried about another uptick in inflation?
It’s not an unreasonable concern to have.
While the most recent consumer price index (CPI) report showed inflation cooling off to 3%, oil prices have risen significantly since that report came out. The price of fuel is a big driver of inflation — it was the main driver in 2022 — so we might expect the CPI to increase the next time the report comes out.
It is therefore wise to invest in assets that have a shot at beating inflation. If inflation is 10% and your investment returns 5%, then you have, in fact, lost 5% of your purchasing power. Inflation has been very elevated over the last two years, creating a high hurdle that investments need to cross. In this article, I’ll explore two stocks with inflation-resistant characteristics that could do well if inflation once again ticks upward.
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Dollarama
Dollarama (TSX:DOL) is a well-known Canadian dollar store chain that offers very cheap prices on popular food items. Examples include the following:
- one-litre sodas
- three-packs of Orville Redenbacher popcorn
- Chips and candy bars
- Bread
- Condiments
Dollarama’s prices on the items above are among the lowest in the nation, easily beating what you’ll find at Wal-Mart.
When inflation is high and is driven by supply issues (rather than wage growth), consumers may become more price sensitive in response to the uptick in prices. There were definitely supply chain issues at play in the 2022 inflation spike. China was under COVID lockdowns for much of the year, and sanctions on Russia temporarily disrupted the flow of oil out of Eastern Europe. Inflation caused by such factors can lead people to cut back on spending if their wages aren’t growing, so, potentially, Dollarama could see an increase in sales if inflation rears its ugly head again.
It’s not that Dollarama needs an “inflation catalyst” in order to be successful. Its most recent quarter was a big beat, with 20.6% growth in revenue and 29% growth in per-share earnings.
Suncor Energy
Suncor Energy (TSX:SU) is a very different kind of inflation play. Unlike Dollarama, it is less about consumers fleeing rising prices and more about the company selling a commodity that people need to have. Suncor is an oil and gas company that sells crude oil and natural gas. It also sells gasoline at its gas station chain, Petro Canada. Petro Canada has hundreds of locations nationwide selling gasoline, one of the biggest contributors to rises in the CPI in recent years. Therefore, if inflation begins rising again, for the same reasons that it rose last year, then Suncor Energy will be one of the main beneficiaries.
Suncor Energy hasn’t been doing as well as Dollarama has in recent quarters. In its most recent quarter, it delivered $11.91 billion in revenue, down 10.7%, and $1.54 in diluted EPS, down 25%. It wasn’t a great showing, but with the price of oil once again rising, Suncor may fare better in the third quarter. Warren Buffett and others think that oil prices will be high in the coming years, so the idea that oil stocks could be good assets in the years ahead has some smart money backing. Suncor is as good a candidate for this trade as any.
