Inflation is starting to heat up again, and the Bank of Canada could be in a tough spot if inflation rises further going into the summer months. We’ll just have to wait and see how those CPI numbers go. In the meantime, though, I do think there are some fantastic names to pick up on weakness while the opportunistic costs of holding cash look to creep higher again. Indeed, perhaps it’s better to own cash flow-generating assets than collect minimal amounts of interest in a savings account as we move into what’s sure to be an uncertain second half for Canada’s economy.
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Barrick Gold
Does it still make sense to go for gold at the first signs of inflation? With shares pulling back sharply in the first half of the year amid the Iran war, questions linger as to whether the asset is a good hedge against geopolitical chaos. And while gold might not be the best inflation hedge here as the miners fall into a nasty bear market, I still think there’s relative value to be had while the miners fall into oversold conditions.
It’s tough to time gold, and while the central bank buying narrative has arguably been overplayed, at least when gold peaked earlier in the year, I do think that the asset makes for a fantastic diversifier. And when it comes to miners, I like Barrick Gold (TSX: ABX) at just 9.8 times trailing price-to-earnings (P/E) while the dividend yield is at 1.8%.
Indeed, the firm might have further to fall if gold’s correction isn’t over. But, at the same time, there could be more upside as gold finds its legs again and the debasement trade returns, perhaps after the U.S. Federal Reserve moves ahead without having to increase interest rates as much as expected.
With some stellar mining assets and a robust balance sheet, Barrick is built to survive a rough patch for gold. With gold hovering at north of US$4,000 per ounce, Barrick is still poised to rake in considerable amounts of cash flow. The low multiple may be too good to be true if gold’s plunge takes us to multi-year depths. But, for the most part, I think Barrick is a wonderful, underrated name to own for investors looking to play gold productively.
Loblaw
When inflation weighs heavily, consumers flock towards value and “trade down” stores and brand names. Loblaw (TSX: L) is embarking on quite an expansion plan as it narrows its focus on high-value banners (think Maxi and No Frills).
With inflation rising and softness in Canadian employment, my guess is that Loblaw’s new stores are going to be hits. It’s what’s happening behind the scenes in the supply chain that I think should have investors most bullish. Grocery margins are thin as can be, but Loblaw is looking to change that as it embraces automation and other efforts to drive down operating costs.
If Loblaw can optimize behind the curtain, I think it can pass more savings onto customers while also padding its margins a bit. Amid intense food inflation, perhaps the disinflationary impact of automation might be coming to the rescue sooner than expected.
