Jhe US Bureau of Labor Statistics recently reported that the consumer price index rose 1.2% on a monthly basis in March and 8.5% over the past 12 months. This year-over-year increase represented the highest level since 1981, and there is a risk that a continuation of the trend could push the stock market into a new bearish phase.
It’s a worrying thought, but the good news is that it could also create conditions for some stocks to thrive. With that in mind, we asked a panel of Motley Fool contributors to shed light on the best stock picks for an inflation-fueled bear market. Read on to see why they identified walmart (NYSE: WMT) The Kraft Heinz Company (NASDAQ: KHC)and ExxonMobil (NYSE: XOM) as good ways to play on current inflationary trends.
A retailer built to handle inflation
Daniel Foelber (Walmart): There’s a reason why stocks like Walmart, Wholesale Costcoand Procter & Gamble hover around their all-time highs as the broader indices fall. All three companies have strong balance sheets and are leaders in their respective industries. And all three have pricing power that puts them in a unique position to fight inflation.
The investment thesis for Walmart is beautifully simple. When prices rise, consumers try to limit their spending. They may not be able to control the prices at the pump. But they can control their discretionary spending to some extent. This could mean buying more products at Walmart and less at Target — and certainly less to Williams Sonoma and other high-end retailers. A look at the stock chart of HRfor example, will tell you everything you need to know about the market’s reaction to high-end retailers in an inflationary climate.
Even after quietly producing a total return of 137% over the past five years and outperforming the S&P500, Walmart’s stock is still relatively cheap. It has a forward price-to-earnings ratio of 23.3. Additionally, Walmart is a dividend aristocrat that has paid and increased its dividend for 47 consecutive years. The company regularly uses additional free cash flow to increase the dividend and buy back its own shares, which is a great way to create shareholder value in addition to reinvesting in the core business.
Add it all up and Walmart’s mix of short- and long-term upside, value, and income makes it a great safe stock to consider now.
Suitable for all weathers
James Brumley (Kraft Heinz): An inflation-resistant stock must actually meet three criteria: the underlying company must be able to pass on its higher costs to its customers, its products must be something the world should buy regardless of price , and ideally, the stock should offer a good dividend yield. You see, a premium is placed on additional cash flow when dollars lose their relative value.
For me, a consumer goods name like Kraft Heinz ticks all of those boxes.
Business is more than ketchup these days. Kraft Heinz is the parent of Oscar Meyer deli meats, Jell-O, Ore-Ida fries, Kool-Aid and Velveeta, to name a few. Not only does home consumption increase when restaurant prices get painful (people have to eat something), but this organization offers some of the most familiar and economical products in the world.
And, we’ve already seen it successfully pass on its increased costs to consumers. That’s how he was able to beat his fourth-quarter earnings estimates, when inflation really started to spike. The earnings supporting its above-average dividend yield of 3.9% are, all things considered, pretty well protected.
Oil is at the heart of inflationary trends
Keith Noonan (ExxonMobil): In light of recent trends, it may seem borderline incomprehensible that oil prices briefly dipped into negative territory about two years ago. Pandemic-related conditions previously created a supply glut, as oil production exceeded existing storage capacity. But there has been a dramatic reversal as economies reopened and demand soared.
Rising oil prices are a key driver of global inflationary trends which now create a whole different kind of economic concern. To some degree, the price of oil impacts virtually every industry under the sun, and it is one of the most important elements of current inflationary trends.
As many companies face rising cost pressure, ExxonMobil’s earnings are rising on the back of soaring oil prices, and it could be one of the companies best positioned to perform if high levels inflation pushes the stock market into bearish territory. Exxon is a titan in its industry, and its massive scale and diverse business model has historically enabled it to perform strongly even when conditions are less favorable than they are now.
If high levels of inflation continue to shape economic conditions in the current direction, it is likely that Exxon will do well relative to the broader market. Even if high inflation were to push the economy into recession and cause consumers and businesses to reduce their consumption of oil and energy, the demand outlook remains favorable for the company.
While progress is being made with alternative energy technologies, trends such as the rise of the global middle class, global population growth and the continued expansion of the global economy mean that oil has never been more important. Exxon Mobile also pays a substantial dividend and its current yield sits at 4% despite recent valuation gains. With rising earnings and favorable performance trends on the horizon, ExxonMobil stock looks poised to outperform and beat inflation.
10 stocks we like better than Walmart Inc.
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Daniel Foelber owns Williams-Sonoma. James Brumley has no position in any of the stocks mentioned. Keith Noonan has no position in the stocks mentioned. The Motley Fool owns and recommends Costco Wholesale, RH and Williams-Sonoma. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.