Inflation tends to hit different businesses differently. Cash-heavy businesses might see the purchasing power of their cash reserves deplete slightly because of inflation, but it’s not as simple as that. The cash reserves can be preserved during high inflation periods and utilized when the inflation rates are more normalized. This way, capital usage can be made more effective.
However, there are certain types of businesses that may not do well during high inflation phases. It might be because of their cash-heavy operational nature or an inability to pass on the additional inflation cost to their customers due to their business model. Either way, there are specific industries you should avoid during high inflation periods.
A transportation giant Canadian Pacific Railway (TSX:CP)(NYSE:CP) has been seeing a lot of major investor activity lately. The company is on the verge of becoming huge through its acquisition of a U.S. railway company, which will expand the company’s reach to Mexico. A prominent name, Bill Ackman, has retaken a stake in the company after tapping out in 2016.
The timing is crucial, as the merger, which has yet to pass one final legal barrier, can make the railway huge. And in the current environment, when the supply chains are already suffering in North America, a well-functioning and expanded Canadian Pacific Railway might emerge as even more fierce competition to the other railway giant in the country.
The share price has been experiencing swift falls and hikes over the last 12 years. A proper growth pattern hasn’t emerged yet, which may be another worthy reason to wait before buying this railway company (apart from the high inflation rates).
A utility company Canadian Utilities (TSX:CU) has the distinction of being the oldest aristocrat in the country. It’s a utility stock on top of that, which only lends more power to the notion that it’s a safe long-term investment — especially now when the stock is slowly and gradually moving upwards while its valuation (modestly overvalued) seems capable of supporting decent growth.
However, utilities might not be the business to invest in when the inflation rates are high and higher than they have been in ages. And if inflation becomes a trigger for a slight stock dip, you may be able to lock in a better yield than the current 4.85% this stock is offering.
The company caters to both residential and commercial customers and provides them with both natural gas and electricity. The company is also diversifying into hydrogen (in a partnership with Suncor (TSX:SU)), which is an avenue that may open doors to new growth opportunities.
Foolish takeaway When learning to invest, it’s essential to know what you should and shouldn’t invest in during different market conditions. Currently, inflation is simply a byproduct of the measures taken to ease the economy during the pandemic. Still, it may become a positive/negative trigger for the market, especially if it remains this high for a while yet.
The post 2 Cash-Heavy Stocks to Avoid Because of Inflation appeared first on The Motley Fool Canada.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.