The reflation trade is here and there are 3 main reasons why.
According to a recent research report from Merrill and Bank of America Private Bank, first is the trillions of dollars of stimulus and liquidity the Fed, Congress and governments worldwide have unleashed to help markets, consumers and businesses.
Second is a weakening dollar—good news for U.S. exports and a sign of renewed global economic confidence.
Finally, a steepening yield curve—with interest rates for long-term bonds rising faster than for short-term bonds—may signal increasing market confidence in the economic recovery.
With these factors driving the “reflation trade”, certain stocks have become increasingly more attractive as investments for the medium to long term.
With growth and inflation accelerating, investors have been eyeing small cap stocks, as well as specific sectors such as commodities, energy, financials, consumer discretionary, and even technology as possible opportunities to play the trend.
We’ve already revealed the first 5 of our top reflation trade stocks in a previous article here.
Here, we’ll reveal another 5 of the best stocks we feel are the top companies to buy for the reflation trade.
“The Housing Market Is Crazier Than It’s Been Since 2006”
That’s the headline from an article in the Wall Street Journal that perfectly describes the housing market at the moment. Thanks to limited inventory, low interest rates, and bidding wars, home prices have been on a tear - making this year the hottest for sales activity in 14 years.
Of course, what benefits the housing sector also benefits home improvement companies, and Lowe’s is a perfect opportunity to take advantage of the booming market.
The Mooresville, N.C. company serves approximately 20 million customers a week in the United States and Canada. With fiscal year 2020 sales of nearly $90 billion, Lowe’s serves more than 2,200 home improvement and hardware stores and employs over 300,000 associates across the business.
The company is planning for $9 billion in share repurchases and $2 billion in capital expenditures in 2021. They’re also looking to grow market share and drive further operating margin expansion as well.
When Warren Buffett buys a stock, investors pay attention.
But when Buffett's Berkshire Hathaway revealed that it had been buying shares of Chevron in the third quarter of 2020, the markets were surprised - to say the least.
That’s because the investment came on the heels of an ill-timed bet on Occidental Petroleum - a company that has essentially plummeted since 2018 and has seen its market cap deteriorate over the last several years.
However with Chevron, Buffett’s performance has come roaring back in a huge way.
After acquiring a stake worth roughly $4.1 billion at the end of December 2020, he’s already racked up major gains this year as the stock has surged.
However, even with energy prices gaining momentum through 2021, Chevron is taking a cautious approach. In the Permian Basin, the company will not increase drilling this year but will slowly increase spending from $2 billion now to pre-COVID levels of $4 billion annually over the next several years. It is currently running about five rigs in the Permian with two completion crews, down from just under 20 a year ago.
Chevron expects to produce around 1 million barrels daily by 2025.
On March 21, 2021, Canadian Pacific Railway Limited and Kansas City Southern (NYSE: KSU) announced a blockbuster $29 billion deal that shook up the industry.
They agreed to enter into a merger agreement, and when combined, the two railroads will create the first rail network connecting the U.S., Mexico, and Canada.
This deal couldn’t have come at a better time. The new U.S.-Mexico-Canada Trade Agreement among these three countries makes the efficient integration of the continent's supply chains more important than ever before.
The combined entity will benefit also immensely as a reflation trade due to its importance in the transportation of goods for infrastructure projects across the U.S. Look for CP to grow much larger over the medium to long term.
For all the talk of the impressive rollout of its rapidly growing streaming service, one business that’s been devastated by the COVID-19 pandemic has been Disney’s parks, experiences, and consumer products segment.
The shutdown of Disney parks in 2020 forced the company to lay off tens of thousands of workers and slashed an important source of revenue for the media company.
In fact, back in 2019, the segment generated $26.2 billion in revenue and accounted for over a third of the company $69.6 billion in total revenue that year.
In 2020, revenue shrank to $16.5 billion, or around 25% of the company’s $65.4 billion in total revenue.
But if you’re looking for a reflation trade, Disney might be one of the best stocks to buy right now.
California’s two Disney theme parks will reopen on April 30 at limited capacity.
And as the vaccine rollout continues, investors can expect restrictions to be loosened further - which will likely boost revenues and propel the stock higher in the months ahead.
Of course, when the COVID-19 pandemic originally hit, bank earnings tanked, companies set aside billions for potential loan losses, buybacks ceased, and dividends were capped.
Compounding the problem was the record low interest rate environment which squeezed net interest margins and made it even tougher for banks to earn profits with the assets that they had.
But many investors don’t realize that the industry spent more than 10 years in a strengthening process which included higher capital, better risk management, and higher liquidity, which essentially prepared the industry for exactly the type of shock the country faced in March 2020.
Compared to the global financial crisis, banks are emerging from this pandemic in a position of strength, and are ready to lend to companies looking to expand in the post-virus world.
However, if you look across the investment landscape, Bank of America looks to be the best bank stock you can own today.
In a recent interview with Barron’s, CEO Brian Moynihan said that BAC’s earnings are set to “substantially increase” from higher interest rates as the bank deploys its large base of low-cost deposits into higher-yielding loans and other assets while keeping expenses under control.
In addition to the expected release of loan-loss reserves, Moynihan also said that investors should expect additional repurchases of stock, pending approval from federal regulators.
The company also remains focused on internal growth while spending over $3 billion annually on new technology to provide better digital services to its customer base.
As the economic recovery accelerates, look for BAC to grow rapidly in 2021 and beyond.