Buy This to Beat Inflation

The government numbers from April put the inflation rate at 8.5%. That’s a big number and you’d have to go back to the late 1970s to find a similar jump in prices.

I was a bit young to fully understand the Jimmy Carter era, but I do remember our neighbors putting in a personal underground gasoline tank, and my father blowing his top if we left a room with the lights on.

I can imagine that the county would have a cow if I dug a big hole and dropped in a 2,000-gallon gas tank. And of course with all the ethanol, any unused fuel would go bad after about six months.

But still I’d be prepared for the Mad Max-style apocalypse.

The bad news is we get to live through high inflation times again. But there are better ways to hedge against future high gas prices than taking physical possession.

In yesterday’s Wall Street Journal, Derek Horstmeyer reported that he discovered the best sector to own during high inflation. He dug through 50 years of data to tell us which industries do the best when costs start ripping higher.

Many people think real estate is the best, or financials. But Derek tells us that energy is the best-performing market during inflationary periods with 18% annualized returns, and materials comes in as a close second at 16.81%.

I agree with him.

Just last week, in this very column, you could have read defining and persuasive arguments that not only will oil go up in value, but oil stocks are the best value in the market today despite their recent run up.

Here is but a small sample:

The oil and energy sectors have been in a massive bull market, and yet they remain cheap. Exxonmobil (NYSE: XOM), the 500-pound gorilla in the sector, has a price-to-earnings ratio of 16 and pays a 3.66% dividend yield.

Chevron (NYSE: CVX) has a P/E of 16 and pays a 3.24% dividend. ConocoPhillips (NYSE: COP) has a P/E ratio of 11 and pays a 1.73% dividend yield.

And this is after they are up 50–90%.

The S&P 500, even after the big selloff, still has a P/E of 20 and pays a 1.53% dividend yield.

I also disclosed hand-selected, steel-cut charts to back up the idea that oil is heading much higher.

You can read the whole thing here.

So assuming my investment thesis is correct and that the world's oil markets are in a crisis mode that, coupled with geopolitical volatility that will send oil prices to record highs, and assuming you believe the research that says oil will be the best-performing market in today’s inflationary environment… it stands to reason that you must own oil stocks.

But where to find the ones that will have the highest returns? For that I asked my esteemed associate Keith Kohl. Mr. Kohl has been following, writing about, and trading the oil markets for the past 20 years.

He is the guy I ask when I want to know about U.S. production, especially in the Permian Basin. Heck, a few months ago I asked him what his favorite oil stock was. He told me about Diamondback Energy (NASDAQ: FANG). I personally bought some and it has more than doubled.

And again, just yesterday he told me in an offhand manner in the kitchen when he was jamming one of those K-Cups into the coffee machine — “Hammer,” he says, “Permian oil production was up from 4.9 mbd in March to an estimated 5.4 mbd today.”

In today's world with OPEC hindered by output constraints, Iran and Venezuela sanctions, and Russia suffering declining production — the U.S. is the only place able to fill the supply-demand gap in crude.

And most of that upside is in the Permian. So as I was waiting patiently to get in the fridge, and knowing I just doubled my money on FANG, I asked him the obvious: “Kieth, what three stocks would you buy if you were buying Permian oil stocks today?

He laughed, took a sip of his steaming beverage, and said he just finished writing up a research report on that very subject. He sent me the link and you can find it here.