Inflation has recently shown signs of heating up once again. Rather than parking funds in savings accounts to earn meager interest, holding assets that generate cash flow may be a more prudent choice amid the uncertain outlook for the Canadian economy in the second half of the year.
Affected by geopolitical factors and other influences, Barrick Mining (B) saw a notable pullback in its stock price during the first half of this year, raising questions about whether gold assets can effectively hedge against geopolitical risks. As the gold mining sector as a whole enters bear market territory, gold may not be the best inflation hedge at present. However, after mining stocks have moved into oversold territory, there may still be relative value to be found among them.
Judging the short-term trajectory of gold is quite challenging. Although the positive impact of central bank gold-buying fervor may have been overly digested by the market during the gold price peak earlier this year, gold’s value as a portfolio diversification tool remains intact. As for mining stocks, Barrick Mining currently trades at a trailing price-to-earnings ratio of approximately 9.8 times and offers a dividend yield of 1.8%, making it reasonably attractive.
If the gold price adjustment has not yet run its course, the company’s share price may face further downward pressure. At the same time, however, as gold prices stabilize and recover, and as the “currency debasement trade” narrative re-emerges—especially against a backdrop where the Federal Reserve may not need to hike rates as aggressively as previously expected—upside potential also exists. With a high-quality portfolio of mining assets and a solid balance sheet, Barrick Mining is well-positioned to weather periods of weak gold prices. With gold currently holding above $4,000 per ounce, the company is still expected to generate substantial cash flow. Although the current relatively low valuation may not fully reflect risks if gold were to plunge sharply to multi-year lows, overall, for investors seeking effective exposure to gold, Barrick Mining represents an undervalued quality pick.
When inflationary pressures intensify, consumers tend to seek value for money and gravitate toward discount stores and value brands. Loblaw Companies Limited (L) is actively advancing its expansion plans, with a strategic focus on high-value store banners. As inflation rises and Canada’s job market shows signs of softening, the company’s new store openings are expected to be well received by consumers.
However, it is the optimization initiatives in the supply chain back end that have investors more optimistic. The grocery industry operates on extremely thin margins, but Loblaw is attempting to change that by introducing automation and other measures to reduce operating costs. If Loblaw can effectively enhance back-end operational efficiency, it stands to modestly expand its profit margins while simultaneously passing savings on to customers. In a high-food-inflation environment, the price-lowering effects of automation may come into play sooner than expected.
In the face of a macroeconomic environment where inflation may once again rear its head, Barrick Mining Corporation offers investors a channel to participate in the gold market, backed by its solid asset quality and cash flow capabilities. Meanwhile, Loblaw, through its focus on the discount retail format and supply chain efficiency upgrades, stands to benefit from shifts in consumer behavior. Both stocks demonstrate certain potential to withstand inflationary pressures within their respective domains.
