You’ve likely taken notice of higher prices in everything from gas at the pump to inflated menu pricing at restaurants. As we head into the holiday season, even that Thanksgiving turkey dinner is likely to cost more than in previous years. This past Friday, the U.S. Department of Agriculture reported that smaller 8-16 lb. frozen turkeys experienced a 27% price increase over last year. It’s a common theme for many food products and commodities that are in demand.
In anticipation of the continued supply constraints we’ve seen this year, consumers have been getting their Christmas shopping done earlier than normal. In fact, domestic retail sales recently hit an all-time high. Meanwhile, consumer sentiment is at its lowest level in the last decade. The graphs below detail the divergence between retail sales and consumer sentiment.
Image Sources: U.S. Census Bureau, University of Michigan, FRED
For the last ten years these measures have mainly moved in sync, with retail sales serving as a reflection of how consumers feel. This year has been different. Consumers are obviously worried about higher inflation as the sentiment graph depicts. However, that hasn’t yet caused them to reduce spending. The pent-up demand created from the pandemic is still very much in play, with retail sales continuing to soar even in the face of higher prices.
Inflation has finally started to rear its ugly head after a massive amount of stimulus has poured into the global economy. The question is – what pockets of the market can we as investors profit from in order to take advantage of this environment?
The answer lies in understanding which stocks have historically performed well when inflation is rising. Companies that are able to profit from increasing prices and pass on larger costs to consumers have a leg up. In the past, the sector that has the highest level of outperformance in periods of intensifying inflation is energy.
Let’s examine three energy companies that are poised to outperform in this environment and are leaders within their respective industry groups.
Chesapeake Utilities Corporation (CPK)
CPK is a utility company that engages in natural gas distribution and transmission, propane distribution and marketing, as well as advanced information services and other related businesses. Domestic natural gas residential prices have nearly doubled this year, and economists are predicting that prices will continue to rise with winter around the corner and colder weather imminent.
Chesapeake Utilities has a Zacks #2 (Buy) ranking and has advanced nearly 26% on the year. The company has produced a positive earnings surprise in each of the last four quarters with an average surprise of 12.6%.
Chesapeake Utilities Corporation Price, Consensus and EPS Surprise
CPK most recently reported earnings earlier this month of $0.71, reflecting a 26.7% increase year-over-year for the previous quarter. This translated to a greater than 31% surprise over the $0.54 consensus. For the year, the current Zacks Consensus Estimate for CPK stands at EPS of $4.75, which would render a 12.8% increase over 2020. Chesapeake Utilities looks to continue its strong momentum heading into next year.
Oneok, Inc. (OKE)
Oneok is a diversified energy company engaged in natural gas processing, gathering, storage and transmission in the United States. The company is the largest natural gas distributor in Kansas and Oklahoma, and the third largest in Texas with almost 2 million customers. OKE is also involved in oil and gas production.
Oneok, currently holding a Zacks #3 ranking, has climbed over 80% this year and has produced a positive earnings surprise in each of the last three quarters. The company most recently reported quarterly earnings earlier this month of EPS $0.88, a 6% surprise over the $0.83 consensus.
ONEOK, Inc. Price, Consensus and EPS Surprise
What the Zacks Model Reveals
Zacks Earnings ESP (Expected Surprise Prediction) looks to find companies that have recently seen positive earnings estimate revision activity. The technique has proven to be very useful for finding positive earnings surprises. In fact, when combining a Zacks #3 rank or better and a positive earnings ESP, stocks produced a positive surprise 70% of the time.
Oneok’s ESP presently sits at 2.8%. The current full-year EPS Zacks Consensus Estimate stands at $3.35, which would represent a nearly 136% increase over last year. OKE is due to report earnings on February 28th, 2022.
Marathon Petroleum Corporation (MPC)
Marathon Petroleum, headquartered in Findlay, Ohio, is engaged in refining, transporting and marketing of petroleum products. MPC is a component of the Zacks Oil and Gas – Refining and Marketing industry group within the Oils and Energy sector.
The sector as a whole, which is currently ranked #1 out of all 16 Zacks sectors, has advanced over 35% on the year. We want to target companies that are outperforming, and MPC certainly fits the bill with a greater than 60% return YTD.
Marathon Petroleum is showing an impressive record of earnings surprises with a beat notched in each of the last ten quarters. The average surprise over the last four quarters is a remarkable 39.1%.
Marathon Petroleum Corporation Price, Consensus and EPS Surprise
For the current quarter, analysts have revised their consensus estimate to EPS of $0.76, which is up over 117% from just 30 days ago. If the company matches this consensus, it would translate to over 180% growth year-over-year. MPC’s current ESP is 10.75%.
On an annual basis, the current Zacks Consensus Estimate is EPS of $1.72, reflecting a 150% increase over 2020. MPC is next slated to report earnings on February 1st, 2022.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.