Following the pandemic in 2020, inflation jumped to the highest levels since the 1980s. Thankfully, cost pressures are easing now – but inflation is down, not out.
The latest report on the Consumer Price Index (CPI) was flat on a month-to-month basis in May, bringing CPI down to a 3% year-over-year rate.
Plus, last week’s Producer Price Index (PPI) was even better news. Cost pressure for producers of goods and services actually fell 0.2% year-over-year in May.
That extends a recent string of less-than-expected monthly PPI data. And the good news is that lower prices at the producer level should eventually filter down to lower consumer prices as well.
Plus, the Federal Reserve’s favorite inflation measure, the mouthful that is known as the Personal Consumption Expenditures (PCE) Price Index, is down to just 2.7%, well off the high of 7.1% two years ago and getting closer to the Fed’s 2% target.
Although the year-over-year inflation rate is declining, it remains at an uncomfortably high level.
Americans are still feeling the pinch of much higher prices than they were paying pre-pandemic. Just take a look at the four-year inflation rate for a variety of goods and services.
- Gasoline: 57.5%
- Auto repair & maintenance: 33%
- Food services (i.e., restaurants): 25.3%
- Food & Beverage (i.e., groceries): 22.7%
- Health insurance: 21.4%
That’s the increase since March 2020 for a selected list of PCE components. Overall, the headline PCE inflation rate is 18.1% since then. And while goods prices are now declining, services costs are still expanding, but at a slower rate.
No wonder consumers still grumble about high inflation.
As for investors, inflation is not good news, either. Historically, inflation is negatively correlated with stock prices. When prices rise, stocks typically fall.
But there are inflation-resilient stocks you can own that can at least keep up with rising costs, and in some cases profit from higher inflation. These stocks fall into several categories, including:
- Real estate investment trusts
- Certain health care and consumer defensive stocks
- And, especially, commodity-producing stocks
Fortunately, TradeSmith has a basket of just such stocks you can include in a stock screener. Then you can search regularly for stocks that can benefit from inflation.
Where to Find TradeSmith Baskets
Log in to your TradeSmith Finance platform and from the main menu bar, click on Baskets. That will bring you to this page:
At the top of the page, under My Baskets, you’ll see any baskets you’ve already created.
If you’re familiar with how to create and use baskets, then you can skip ahead a bit. If you’re not familiar with Baskets, here’s an intro.
You can think of baskets as a collection of securities that you may want to continuously follow, similar to a watchlist portfolio. The main difference here is that a watchlist portfolio is designed to track positions and their performance over time. Plus you can set alerts to help you find entry or exit points.
A basket would be a “lite” watchlist that can travel across the various tools and features of TradeSmith Finance. I’ll cover more about baskets below, or you can click here for an in-depth TradeSmith Bootcamp webinar on baskets.
TradeSmith Baskets Basics
Now, after My Baskets, you’ll find our pre-defined TradeSmith Baskets. These include:
- 401k Red Zone Time Bombs: unhealthy stocks you’ll want to avoid owning in your retirement accounts.
- Bearish and Bullish Harmonic Convergence: stocks that combine our timing tools with the Relative Strength Index, which I recently covered here.
- Money Movers Up or Down and the Predictive Alpha baskets: stocks that fit our proprietary tools for watching institutional money flow and price projection. A TradeSmith Platinum membership is the best way to access the algorithms and tools behind these baskets.
- And Commodity Stocks: stocks from the energy, materials, chemicals, energy equipment & services, food products, and metals & mining sectors and industries. That’s the one we’ll focus on today, but there are many more TradeSmith baskets you can explore.
Additionally, each stock in the Commodity Stocks basket must be in the Green Zone, in an uptrend, and have a VQ% less than 30%, as well as a few other price and volume factors.
Now for the fun part. If you’re a longtime reader you know I’m a quantaholic (and so is my colleague Jason Bodner). I just love running stock screens by combining different filters to give me a curated list of stocks I can further research as new potential buys.
So, today I’ll show you how to combine our Commodity Stock basket with a few other interesting filters. But remember you can also click on the name of any TradeSmith basket to see the full, unfiltered list of stocks that qualify.
You can pick any basket to use within a customized stock screener. I’m excited to show you the endless possibilities!
How to Screen with Baskets
From the main menu bar, click on Invest, then Screener, and click on the + Create new screener button. That’ll bring you to this page, where I’ve already selected a few filters using the + Manage Filters link.
So, why these particular filters? Remember the basket is already limited to healthy Green Zone stocks in an uptrend, so there’s no need to add those. Under TradeSmith Baskets, I selected Commodity Stocks, but remember you can select any of our baskets.
For Rating, I chose Bullish or Strong Bullish.
Then I added two filters for quality and profitability. Free Cash Flow more than $0 filters the list to include only stocks that are free cash flow positive. After all, there are plenty of cash-burning stocks out there.
I also added Business Quality Score (BQS) more than 50 to include only stocks in the top half of our multi-factor quality ranking.
You could also cross-reference the list of commodity stocks with another one of our proven strategies.
Simply add the TradeSmith Strategies filter and use the drop-down menu to select any strategy or multiple strategies. These include strategies from the Ideas Lab, Money Movers, and Trade Cycles, depending on your subscriptions.
Now, for the final piece of the screener, I want to sort results by Free Cash Flow Yield DESC (descending) to show the highest-yielding stocks at the top. But you can sort the list by health, BQS, or any other filter you choose.
Be sure to save your screener so you can revisit your work. In my screenshot you’ll see that I’ve got an orange button that lets me create a TradeSmith screener. But since you’ll be accessing TradeSmith as a user, not an admin, you’ll just have Save as New. Click that to save your settings for later, then click on Run Screener.
I got a list of 33 commodity stock results that also met my criteria for quality and profitability. That’s a nice-sized list for further research.
Here are my top 10 results:
Just among the top 10, you can see everything from energy stocks to gold miners and consumer staples. To varying degrees, these companies have pricing power. This gives them a good chance to pass along cost increases to keep their profits strong, even with inflation up nearly 20% over the past four years.
Set Up Your Own Basket
Now, here’s how to create your own basket. To the left of each stock name you want to include in your basket, click to add a checkmark, then save the list to a New Basket as shown below.
Give the basket a descriptive name so you’ll remember what’s included, like “Mike’s quality, FCF, commodity stocks,” and then click Add. Now when you open the Baskets page from the main menu, you’ll see your saved basket under My Baskets.
You can also save the list as a New Portfolio instead of a basket, or add any checked stocks to an existing basket or portfolio.
Personally, I make baskets as thematic watchlists of stocks, depending on the filters I use to create them. Then I do more research before potentially adding new stocks to my portfolio.
Mike Burnick’s Bottom Line: Remember, there are many creative ways to produce your baskets for further research. You can take any existing TradeSmith basket as a starter, then make it your own by mixing in different strategies and filters as I did above. There’s no limit beyond your own imagination – especially with a TradeSmith Platinum membership.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith