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Warren Buffett: High Inflation Causing These Stocks Flying High!

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Warren Buffett is seeing “substantial inflation.”

In a CNBC article, Buffett stated, “Inflation has started to accelerate “due to multiple factors, including increasing demand and struggles with some areas of the supply chain” as well as filling in for the inflation that should have happened last year but didn’t due to the abnormal economic year from pandemic impacts.”

The CNBC article continued to quote the legendary investor, “We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up. It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”

It’s no wonder publicly traded home builder stocks like Home Depot and Lowes have been on a tear! Respectively, their stocks have appreciated approximately 50% and 86% in the last 12 months. The rising inflation has also driven specialty retailer Williams-Sonoma stock about 177% higher.

High inflation is having a ripple effect. Basic material stocks like Teck Resources (TSX:TECK.B)(NYSE:TECK) and West Fraser Timber (TSX:WFG)(NYSE:WFG) are benefiting from higher prices in copper, steel, and lumber.

Teck Resources reported its first-quarter results last week. It witnessed its revenues rising 7% to $2.5 billion, while its adjusted EBITDA climbed 59% to $967 million year over year.

West Fraser Timber will be reporting its first-quarter results on Friday. Perhaps it’s because of this delay that it currently trades at a bigger discount than Teck Resources. Analysts presently expect West Fraser stock to have about 14% upside potential over the next 12 months versus Teck Resources’ 9% upside, as Teck’s Q1 results have already been reflected in its stock price.

The rising basic material costs are driving up the raw material costs for construction companies like Bird Construction and Aecon, but they’re likely able to pass on most if not all the higher costs to its customers. The stocks appear to be decently valued with near-term upside potential of about 18% and 20%, respectively. The construction companies provide nice yields of 4.2% and 3.7%.

The leader in the space is WSP Global, which enjoys higher margins than Bird Construction and Aecon but provides a smaller yield and less near-term upside potential of 1.2% and 6%, respectively.

It was perceived that the stock market turned red yesterday because Treasury Secretary Janet Yellen commented that interest rates may need to increase to prevent the economy from overheating. That was noise rather than useful news as the down day proved to be short-lived, as following it was the North American markets rebounding today.

Even when interest rates do increase, it’ll only be a temporary dampener on the stock markets as long as they’re not raised extravagantly in a short period.

The Foolish takeaway

Some of the aforementioned stocks that benefit from higher inflation have appreciated a lot lately already. They’re pretty fully valued. They could grind higher in the near term but understand that the easy money has been made. Among all the stocks discussed, there’s a bit of a delay in the reflection of inflation in construction companies like Aecon and Bird Construction, from which investors can get relatively safer upside.

At the end of the day, investors can choose to ignore the noise and focus on buying quality companies whenever they’re trading at good valuations. Holding these stocks for the long haul should lead to outperforming returns.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned. David Gardner owns shares of Lowe's. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Lowe's.

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