The U.S. Bureau of Labor Statistics recently updated the inflation rate for November 2021, saying that average prices rose 6.8% over the last 12 months -- the highest since 1982, if you're keeping score. Granted, the economy is in a very different place than it was nearly 40 years ago, but some investors worry that ongoing inflation could kill returns for stocks.
But not all stocks are created equal. Three Fool.com contributors think Applied Materials (AMAT -2.08%), IBM (IBM 0.02%), and Micron Technology (MU -0.85%) can easily outpace inflation, and are worth a look right now.
A builder of technology's basic building blocks
Nicholas Rossolillo (Applied Materials): Supply-chain issues continue to wreak havoc on certain industries. Supply shortages of basic goods were a leading cause of inflation this past year, and are expected to keep inflation running hot through at least part of 2022. The chip shortage, which all indications point to lasting into 2023, is a case in point. Pandemic lockdowns have exacerbated what was already a stressed global supply from the U.S.-China trade war, and now demand for chips is rising rapidly for everything from cars to data centers to everyday household items.
There are lots of great semiconductor stocks out there, but for investors who want broader exposure to the industry overall, I like Applied Materials. The company makes the equipment that makes semiconductors and provides ongoing services to chip fabrication companies ("chip fabs"). Applied just started its new 2022 fiscal year and provided a rosy outlook for the industry. With tight supply and some end customers booking out orders until 2023, fabs are buying plenty of new equipment to ramp up production of technology's basic building blocks.
Of course, messy global supply chains are also limiting Applied's ability to get its equipment into the hands of manufacturers. But no bother. At the midpoint of the outlook for the first quarter of fiscal 2022, management sees a 19% year-over-year increase in revenue -- compounding the 24% growth rate posted last year. And with additional new sales, this business's profitability is also on the rise. Adjusted earnings per share are expected to jump about 33% in Q1.
To sweeten the deal, Applied is a mature business that targets returning 80% to 100% of free cash flow to shareholders via a modest dividend and share repurchases. Simply put, this is a rock-solid stock to help you get started investing in the semiconductor industry. At just 17.5 times forward-12-month earnings, Applied Materials is poised to beat inflation next year.
A Dividend Aristocrat with a 5.3% yield and awesome growth prospects
Anders Bylund (IBM): With U.S. inflation hitting multidecade highs, it's a good idea to lean on some ultrareliable dividend stocks. It's also a bonus if their effective dividend yields are on the generous side. Good old International Business Machines ticks both of these boxes -- and more.
Few companies can match Big Blue's staying power. IBM was founded 110 years ago, surviving two world wars and assorted economic crises along the way. The company was built to last, even in a rapidly changing business environment.
IBM's leadership is firmly committed to a solid dividend policy. The stock recently qualified as a Dividend Aristocrat, having provided an unbroken string of rising payouts per share for 25 years. Here's what that looks like in a 25-year chart:
The company spun off its legacy operations in information technology infrastructure services earlier this year, creating a new company named Kyndryl Holdings (KD -0.49%). Before the spinoff, management pledged to maintain the combined dividend payouts of Kyndryl and IBM at the pre-separation level. Since the creation of Kyndryl, IBM has continued to declare the same payout as before, while Kyndryl has made no indication that it plans to offer any payouts at all. Therefore, I expect IBM's dividend increases to continue for the foreseeable future.
This policy really is the best of several different worlds. There are 65 Dividend Aristocrats on the market today. Among these, IBM's 5.3% dividend yield is the third-highest. On top of all this inflation-busting cash distribution, IBM's stock also strikes me as a deeply discounted value investment with bright prospects for shareholder-friendly stock-price gains. Giving Kyndryl the boot should accelerate those gains even further.
Finally, you can get all of this proven long-term stability and promised future growth via a fire sale. IBM shares have fallen 14% in the last 6 months, and are now trading at just 14 times free cash flow, and 12 times forward earnings. Locking in these thrifty discounts today looks like a great way to balance out historically high inflation rates.
One of the cheapest tech stocks around
Billy Duberstein (Micron Technology): Which tech stocks can beat higher inflation and interest rates?
First are those with a lower valuation on current profit: Higher inflation would discount future earnings by a greater degree, so in theory, high-multiple growth stocks would get hurt more than value stocks. Second, stocks with low debt should do better, as costs of refinancing would go higher. Third, stocks with pricing power should exceed those that don't have any. And fourth, if a company actually sells products with prices that are subject to inflationary forces, it would benefit.
Micron meets three of the four criteria. It has a low valuation with a forward price-to-earnings (P/E) ratio of just 9. It has more cash than debt. And while Micron doesn't have pricing power, it would benefit from inflation specifically in DRAM (dynamic random access memory) and NAND flash (another storage format) products.
Of course, DRAM and NAND are specific products that may or may not see the same growth in prices as in broad-based inflation. However, several players in semiconductor equipment recently indicated they were unable to meet demand last quarter. If shortages of semiconductor equipment continue or get worse, it could be harder for the DRAM and NAND industry to produce more chips. DRAM and NAND flash are commodity-like products whose prices fluctuate with supply and demand, so if there's a shortage of memory chips, prices are likely to go up and Micron's profit margins could follow.
Micron should also be getting even more cash in the door this quarter in particular. The company just sold its plant in Lehi, Utah, to Texas Instruments for $900 million; it also just settled an intellectual property (IP) lawsuit against United Microelectronics, for which it will receive an undisclosed sum in payment. That will only add to Micron's $3.7 billion net cash pile as of last quarter, with the potential for much to be distributed via share repurchases and dividends.
In addition, Micron still sits below its all-time highs, as it sold off over the summer on demand fears. However, several analysts recently upgraded Micron based on better-than-expected demand trends for DRAM in the first half of 2022. It appears that the recent soft patch was either short-lived, or due to supply shortages of other components that are now being resolved.
In the big picture, DRAM memory and NAND flash storage go into all computing devices, and they'll be needed in droves for new applications like AI and machine learning, autonomous vehicles, and the metaverse. Micron Technology looks like a solid pick for 2022.