Jefferies Top 2018 Stock Picks for a Rising Inflation Economy

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Like the proverbial hibernating bear, inflation has been sleeping for years. The Great Recession and subsequent market implosion took interest rates to the lowest levels since the 1930s and 1950s. Wage growth and commodity price increases were next to impossible as everything came tumbling down. Since the dark days of 2008 and 2009, we have seen the economy slowly fight its way back.

After the election of Donald Trump in 2016, we have seen business, corporate and consumer optimism skyrocket, and after two straight quarters of 3% or so gross domestic product growth, the economy seems to be really heating up.

A new Jefferies report makes the case that it may be time to rotate to companies that are beneficiaries of rising inflation, and they explained why:

As we enter 2018, the positioning and sentiment around “inflation animal spirits” is much more tempered. However, our Equity Strategist and Global economist both believe 2018 will be a year marked by reflation. Sean Darby, the firms Global Equity Strategist sees a return of inflation on a mix of a synchronized global economy, pent-up investment demand, tight labor markets and loose monetary policy and a market where Industrials, Banks, Materials will lead indices higher. Ward McCarthy Jefferies Global Economist also believes Inflation acceleration is ahead on 3 key themes: Housing supply shock from natural disasters will drive the shelter component of consumer price index, rising prices of imported goods will get passed to the consumer and overall inflation will be boosted by supportive base effects.

Energy, steel, chemicals, and metals and mining all look like sectors that could benefit, and Jefferies thinks there are some outstanding reflation plays in 2018.

Integrated Oil

Chevron Corp. (NYSE: CVX) is a safer way for investors looking to stay or get long the energy sector. The integrated giant has big Permian Basin exposure and is in the Jefferies Franchise List portfolio. It is a U.S.-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. Shareholders receive an outstanding 3.61% dividend. The Wall Street consensus price target is $128.55. The shares closed Wednesday’s trading at $128.51 apiece.

Exploration and Production

Jefferies prefers Permian Basin companies.

Concho Resources Inc. (NYSE: CXO) is one of the top energy plays in the Permian Basin in West Texas and southeast New Mexico, and the stock is a Wall Street favorite. The independent oil and natural gas company is engaged in the acquisition, development and exploration of oil and natural gas properties. Its principal operating areas are located in the Permian, where it owns 600,000 net acres. The company has 624 MBoe of proven reserves, of which 57% is classified proved developed and 59% is oil. The Wall Street consensus target at $154.97, and shares closed Wednesday at $152.59.

Diamondback Energy Inc. (NASDAQ: FANG) is another top Permian Basin play for more aggressive accounts. This independent oil and natural gas company is headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves. Its activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations of the Permian Basin. The Wall Street consensus price target is $129.67. Shares closed most recently at $129.17.

RSP Permian Inc. (NYSE: RSPP) remains a top pick across Wall Street for Permian exposure. It is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves. The vast majority of the company’s acreage is located on large, contiguous acreage blocks in the core of the Midland Basin, a subbasin of the Permian. Historically a vertical producer, the company has been transitioning to horizontal drilling the past few years. The stock caught a string of upgrades from top Wall Street analysts last year, and many have pointed to the possibility that it may very well be a potential takeover candidate. The Wall Street consensus price objective is $46.29. The shares closed Wednesday at $41.48.

Oilfield Services

C&J Energy Services (NYSE: CJ) is well liked across Wall Street. This smaller cap play is a completion and production services company that provides well construction, well completions and well services to the oil and gas industry. It also manufactures, repairs and refurbishes equipment used in the oilfield services industry, and it operates in various North American onshore basins. The Completion Services segment includes the hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services. Its Well Support Services segment includes rig services, fluid management services and other special well site services. The Wall Street consensus target price is $39.77. Shares closed Wednesday at $33.56.