Inflation took the world by storm this year. Supply bottlenecks, labor shortages and helicopter money from the government delivered the highest consumer price index (CPI) reading in nearly 40 years.
November’s red-hot 6.8% print for the CPI is officially the most significant year-over-year jump in prices since 1982. Thus far, Wall Street is taking the sharp rise in stride. While some areas (such as growth stocks) are suffering from the specter of higher interest rates, others, like metal stocks, are loving it.
Generally, the basic material and energy sectors outperform during periods of higher inflation. So if you think the recent muscle-flexing in these areas is a sign of things to come, then the following companies should perform well.
I scanned all the metal stocks in my watchlist, and these metal stocks were the three boasting the best trends.
- Alcoa (NYSE:AA)
- Freeport McMoran (NYSE:FCX)
- Newmont Mining (NYSE:NEM)
Metal Stocks: Alcoa (AA)
Source: The thinkorswim® platform from TD Ameritrade
After basing for three months, Alcoa shares finally took flight this month to continue their long-term uptrend. With the recent gains, AA stock is now up almost 160% on the year. Volume confirmed the recent breakout with a groundswell in accumulation days. In addition, the 20-day moving average is ramping nicely to confirm the increased momentum.
Whether it’s renewed buying in response to the inflation uptick or merely a continuation of the market’s post-pandemic lovefest for economically sensitive securities doesn’t matter. Either way, Alcoa is in favor, and the chart points to higher prices.
I prefer high-probability spreads over direction due to the stock’s choppy nature.
The Trade: Sell the Feb $47/$42 bull put spread for 56 cents or better.
Consider it a bet that AA will be above $47 at expiration.
Freeport McMoran (FCX)
Source: The thinkorswim® platform from TD Ameritrade
Freeport-McMoran shares got caught up in the metal stocks bonanza. Like Alcoa, it was previously consolidating for multiple months. That makes the recent breakout all the more tempting.
Historically, FCX follows in the footsteps of copper prices. On Monday, copper futures broke above the 50-day moving average and could be starting a new advance. If so, it will bode well for Freeport.
Implied volatility for FCX options has sunk to the 5th percentile of its one-year range. This means call premiums are now cheap. As a result, I like bull call spreads.
The Trade: Buy the Feb $42/$45 bull call spread for $1.20 or better.
The max loss is $1.20, and the max gain is $1.80. To capture the entire reward requires FCX to sit above $45 by expiration.
Metal Stocks: Newmont Mining (NEM)
Source: The thinkorswim® platform from TD Ameritrade
Gold prices haven’t been nearly as responsive to the high inflation readings as gold bugs would have liked. As a result, many gold mining companies have seen their share prices struggle this year. That said, Newmont Mining is the best looking of the bunch, so if you think equities linked to precious metals will experience a reversal of fortune, then NEM stock is the best way to play it.
The price trend just completed a bottoming pattern by breaking above resistance near $59. The 20-day and 50-day moving averages are curling higher to reflect the newfound strength. The low price tag and modest implied volatility make building a naked put trade easy.
The Trade: Sell the Feb $55 put for 70 cents or better.
By selling the put, you obligate yourself to buy 100 shares of stock at $55. But, if NEM stock stays above $55, then the option will expire worthless, and you’ll pocket the premium.
— Tyler Craig
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Source: Investor Place