While there are several reasons why people buy gold, the main one is as a hedge against inflation. That said, stocks tend to beat gold at its own game, which is why we prefer them over the shiny metal. Three stocks that we think have the potential to outperform it in the coming years are Brookfield Infrastructure Partners (NYSE:BIP), Phillips 66 (NYSE:PSX), and Sociedad Quimica y Minera de Chile (NYSE:SQM).
A better way to beat inflation
Matt DiLallo (Brookfield Infrastructure Partners): As mentioned, one of the allures of gold is that it can help hedge against inflation. However, that hasn't been the case in recent decades, which is why I think investors should consider global infrastructure giant Brookfield Infrastructure Partners instead because it has built inflation protection into many of its contracts. That's one reason why the stock has significantly outperformed the market -- and inflation -- over the past decade, delivering a 20% total annualized return, while the S&P 500 has only risen by a 9% yearly rate, and inflation has edged up by about 3% annually in recent years.
Brookfield Infrastructure Partners gets about 75% of its earnings from assets backed by long-term contracts or regulatory frameworks that capture inflationary price increases. Because of this, the company expects that this ability to benefit from inflation will boost earnings by 3% to 4% annually.
In addition to that, about a third of Brookfield Infrastructure's earnings benefit from GDP growth because volumes on those assets rise as economies expand, which gives it the potential to add 1% to 2% to its bottom line per year. Meanwhile, the company can further boost earnings by expanding its assets, which can increase profits by another 2% to 3% annually. Add it all up, and Brookfield believes it can grow earnings by a 6% to 9% annual rate, which should fuel 5% to 9% yearly growth in the company's 4.6%-yielding distribution. This forecast suggests Brookfield can continue producing double-digit total annual returns, which should easily outperform both inflation and the price of gold.
Invest with the best
John Bromels (Phillips 66): Investing in gold just doesn't make sense. But you don't have to take my word for it. Listen to investing titan Warren Buffett, who holds the same dim view of gold:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
Instead, Buffett -- and like-minded investors -- prefer to put their money in businesses that actually do something useful. So, investors may want to follow not only Buffett's advice but also his example and invest in midstream/downstream oil company Phillips 66.
Buffett's Berkshire Hathaway owns more than 15% of Phillips 66, a shareholder-friendly company that has repurchased some $12 billion in shares since 2012, and which currently sports a dividend yield of above 3%. The company had a banner year in 2017 as high demand for refined fuel products, coupled with low oil prices, improved its margin. And while the rising price of oil means 2018's margin may not be as high, the company's midstream segment looks ready to pick up some of the slack with several recently completed and in-progress pipeline expansion projects, as well as a big chemical plant expansion in Texas.
The recent market correction has pushed Phillips 66's stock well below $100/share, which makes this a great time to invest with Buffett in a company that actually does something.
Get some utility out of the stuff you're pulling from the ground
Tyler Crowe (Sociedad Quimica y Minera de Chile): I'm not going to argue against investing in metals and materials, but one issue I personally have with investing in gold is that there is little utility for the stuff. Outside of some niche industrial use and jewelry, gold is a speculative store of wealth, where the price of the stuff typically has more to do with economic fiscal policies than supply and demand. If I'm going to invest in a high-value material, let it be something with high utility value, like lithium.
Lithium is becoming more important by the day. Lithium-ion batteries have emerged as the go-to energy storage device for electric vehicles and as intermittent storage for solar and wind power-generating facilities. According to Bloomberg New Energy Finance, electric-car production is expected to increase more than 30-fold between 2017 and 2030, and miners will have to supply enough lithium to meet the demand equivalent to 35 of Tesla's Gigafactories.
For Sociedad Quimica y Minera de Chile -- aka SQM -- that is rather encouraging news because it has large land holdings in what's called the Lithium Triangle -- a high desert in Chile, Bolivia, and Argentina that has 49% of the world's lithium supply. Today, SQM is responsible for 20% of the world's lithium supply, and it is one of the lowest-cost operators out there. As a result, SQM has turned in some rather impressive rates of return and has plans to double production between now and 2019.
As is the case with any other hot commodity, chances are we are going to see wild fluctuations in price. Lithium isn't an especially rare element, and miners tend to overestimate future supply that leads to the occasional price slump -- sounds an awful lot like gold, doesn't it? However, as one of the lowest-cost producers out there with a reasonable balance sheet, SQM looks like a great investment in the lithium industry.
John Bromels owns shares of Berkshire Hathaway (B shares) and Tesla. Matthew DiLallo owns shares of Berkshire Hathaway (B shares), Brookfield Infrastructure Partners, and Phillips 66. Tyler Crowe owns shares of Berkshire Hathaway (B shares) and Tesla. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Tesla. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.