- Lukasz Tomicki estimates that inflation will return to its historical norm of 2% by 2023.
- It invests in sectors that have priced in a recession and stocks punished by inflation fears.
- Tomicki shared 11 stocks to buy for gains in both categories.
Last year, the explosion of consumer demand and pandemic-induced supply chain bottlenecks merged perfectly to propel prices higher, creating a maelstrom that was only fueled by the production pressures resulting from the Russian-Ukrainian crisis.
Then in March, the Consumer price index – a common benchmark for inflation – rose 8.5% year-on-year, marking a 40-year high.
High prices and high inflation may have spooked the market, but Lukasz Tomicki, the founder of LRT Capital Management, a firm with around $140 million in assets under management, isn’t worried.
“The amount of demand that there was in the economy is going down, and you’re going to have a normalization of the outlook for inflation because wages are rising more slowly than inflation,” Tomicki explained in an exclusive interview with Insider. .
He believes inflation has already peaked and expects it to “fall sharply” in the second half of the year, reaching 3% by October and 2% by early 2023.
Tomicki also doesn’t think geopolitical tensions will cause a massive headwind to the U.S. economy as many investors fear. “Of course it’s going to affect us, but the United States is not a big manufacturing economy or an economy that relies so much on raw material inputs,” he said.
Finally, despite the current cycle of monetary policy tightening, Tomicki is convinced that the
will successfully maneuver a soft landing for the economy.
“The idea of a soft landing refers to the fact that we are going to have tighter monetary policy and a macroeconomic slowdown, but they will succeed in calibrating policy in such a way that we do not have
“, he said. “I think it’s actually more likely than people think.”
Invest in sectors where investors have priced in recessions
Broadly, Tomicki divides the sectors he believes will outperform over the next few months into two categories.
The first category includes sectors where investors have already anticipated a recession that is not likely to occur.
“Almost everything about house building, house building, and home furnishings are priced as if some sort of major downturn is brewing. I would fundamentally disagree with that,” Tomicki said. He thinks the combination of strong housing market demand and weak supply is reason enough for prices to remain high.
Tomicki referenced a well-known home builder NVRs (NVRs), which is down nearly 24% from its December high on fears of a major housing market pullback, as a stock that looks undervalued at the moment. Similarly, the shares of more speculative companies Williams Sonoma (WSM), a seller of luxury home goods and furnishings, have fallen nearly 25% since the company’s all-time high in November, despite its strong price-to-earnings ratio, strong profitability and history of buybacks. actions.
Tomicki also sees opportunities in suppliers of home fittings and wood products such as BlueLinx (BXC), FirstSource Builders (BLDR), and TopBuild (BLD), which may have suffered from soaring lumber prices, as well as DIY stores like Lowe’s (LOW) and Home deposit (HD).
“Once you own a home, you’ll realize that you can’t do anything around the house without a trip to Home Depot, and there are more and more homes in the United States and the density population continues to grow,” said Tomicki, who also highlighted the company’s strong returns. Additionally, he sees investment opportunities in companies like watsco (BSM) and A. O. Smith (OSA), which supply the air conditioning and water boiler parts respectively.
Tomicki also includes Car manufacturers and car dealerships in this category.
“The auto industry is heavily dependent on credit and finance, so it’s expected that as financial conditions tighten, autos will take a big hit,” Tomicki said. “The reality is that for most car dealerships, 40% of gross profit comes from parts and service, which isn’t very cyclical.”
Invest in undervalued, high-growth, long-term quality companies
The second of Tomicki’s categories deals with high-growth, long-term, quality businesses which typically trade at higher valuations.
“These have come down a lot over the past six months due to fears of higher inflation,” he said. “If you think inflation is going to moderate, then these should do better, right? Once the narrative and the tide turn, then you should get a revaluation to more historic multiples.”
Tomicki pointed out Dominos Pizza (DPZ), its most important position in its portfolio, as a company in decline despite very good profits. The company should do especially well if a global fertilizer shortage catapults food prices higher.
“It’s a business that’s operating at the lower end; it’s a food value play. They’ll be relatively better off because all the alternative food options for Americans are going to get more expensive,” Tomicki said. “Their ability to raise prices will actually be enhanced.”
A European company that falls into this category is Coloplast (CLPBY), which makes colostomy bags and other medical devices, Tomicki said. He also puts netflix (NFLX) in this category – despite the stock falling almost 45% at the end of April when it announced its first quarter results.
Tomicki thinks the on-demand entertainment trend, especially outside of the US, is long term – and that
will remain the most dominant player in the industry. Currently, the
222 million subscribers worldwide, but Tomicki thinks that number could reach 800 million one day. The company is also one of the only currently profitable streaming platforms, compared to rivals like Disney+.the service has around
“Netflix, they’ve been very successful in pivoting and changing and adapting the business over a long period of time. It’s not the first time they’ve faced challenges, and you’re not paying a lot for it. “future. I think there are a lot of options that are not being considered,” Tomicki explained.