Despite the U.S. Federal Reserve’s aggressive rate hikes — including three consecutive hikes of 75 basis points — inflation is still running hot.
Consumer prices in the U.S. climbed 0.4% in September and were up 8.2% from a year ago.
High inflation not only erodes the purchasing power of money but also means the Fed will likely remain hawkish. And that does not bode well for the stock market.
Will inflation go back to normal anytime soon?
Bank of America doesn’t believe so.
“Historically, it takes an average of 10 years for a developed economy to return to 2% inflation [once] the 5% threshold is breached,” the bank says in a recent note.
BofA highlights sticky wage inflation, population aging, and underinvestment in energy as reasons why price levels would remain elevated. According to BofA’s projection, oil prices would average $100 per barrel next year.
If BofA is right, energy stocks might see even better days ahead. Here’s a look at two energy names that the bank finds particularly attractive.
Exxon Mobil (XOM)
Exxon Mobil is an oil supermajor commanding over $400 billion market cap.
While the broad market is deep in the red in 2022, Exxon shares have climbed 58% year to date.
It’s not hard to see why investors like the stock: the oil-producing giant gushes profits and cash flow in this commodity price environment.
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In the first six months of 2022, Exxon earned $23.3 billion in profits, a huge increase from the $7.4 billion in the year-ago period. Free cash flow totaled $27.7 billion for the first half, compared to $13.8 billion in the same period last year.
Solid financials allow the company to return cash to investors. Exxon pays quarterly dividends of 88 cents per share, translating to an annual yield of 3.5%.
Bank of America has a ‘buy’ rating on Exxon and a price target of $123. Since shares trade at around $100 right now, the price target implies a potential upside of 23%.
ConocoPhillips is another big player in the energy sector. It had proved reserves of 6.1 billion barrels of oil equivalent and produced 1,567 thousand barrels of oil equivalent per day in 2021.
Just like Exxon, ConocoPhillips is firing on all cylinders thanks to strong energy prices.
In Q2 of 2022, the company’s average realized price was $88.57 per barrel of oil equivalent — a 77% increase from the $50.03 per barrel of oil equivalent in Q2 of 2021.
ConocoPhillips’ adjusted earnings came in at $5.1 billion for Q2, tripling the $1.7 billion it earned in the same period last year.
In August, the company announced a $5 billion increase in planned 2022 return of capital to $15 billion. Its latest dividend included an ordinary dividend of 46 cents per share and a variable return of cash payment of $1.40 per share.
ConocoPhillips shares have already surged 61% year to date and Bank of America sees further upside on the horizon. The bank has a ‘buy’ rating on the company and a price target of $140 — roughly 34% above where the stock sits today.
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