Inflation resistant stocks might seem an idea destined for gradual irrelevance based on economic reports from the past few weeks. First up, the headline print of the June jobs report came in lower than expected, representing a rather sharp pivot from prior labor market data. Fundamentally, this framework implies fewer dollars chasing after more goods, which is deflationary.
Another factor reflecting challenges to the narrative for stocks to buy during inflation is recent disclosures of inflation indicators. Basically, the pace of consumer price growth has started to fade, suggesting that the Federal Reserve is on the right track. Therefore, inflation battle stocks seem inconsistent with underlying realities.
At the same time, the monetary policy battle is far from over. For example, in the latest jobs report, the unemployment rate declined while hourly wage growth stabilized at robust levels. Overall, the Fed continues to fight against historically high consumer prices. Thus, the best stocks for inflation are still relevant for investors.
Nevertheless, going too hawkish may spark a recession, which the Fed can’t afford to materialize. Given the tricky circumstances involved, it’s best to keep track of smart stocks during inflation.
Inflation Resistant Stocks: Aflac (AFL)
Rating as one of the more boring entities among inflation resistant stocks, Aflac (NYSE:AFL) received an organic marketing boost from the Covid-19 pandemic. As a supplemental insurance specialist, Aflac essentially operates as an in-case-stuff-happens enterprise. And by “stuff,” you know exactly what I’m referring to. Anyways, a lot of stuff – once-in-a-century stuff – happened in 2020.
Given that these pandemic-related memories (nightmares) are still fresh, I believe that Aflac got a lot more relevant from a public perception framework. Thus, AFL represents one of the compelling stocks to buy during inflation, deflation, disinflation, or some other “-flation” concept. Put another way, no matter what happens in the economy, people will likely seek financial coverage against the unknown.
To be fair, AFL represents more of a narrative play for best stocks for inflation rather than an objective catalyst. For example, AFL trades with a forward earnings multiple of 12.66, which is overpriced. Still, the company commands a strong trailing-year net margin of 22.9%. As well, it’s consistently profitable.
Inflation Resistant Stocks: Procter & Gamble (PG)
A consumer goods giant, Procter & Gamble (NYSE:PG) effectively offers permanent relevance. However, the drawback to such a powerful narrative is that it’s inextricably one of the most boring inflation resistant stocks you can ever hope to buy. Look, we’re talking about an enterprise that became a must-have business during the Covid-19 crisis because of its toilet paper.
Frankly, I don’t see such a narrative materializing for PG stock for the rest of my life. Nevertheless, it still rates as one of the best stocks for inflation (or any other “-flation”) because of its pertinence. Without getting too graphic, people are going to take care of business, recession or no recession.
On a financial note, Procter & Gamble doesn’t exactly offer a remarkable idea for prospective investors. Again, we’re talking about a rather pricey idea based on its forward price-earnings (PE) ratio of slightly over 24X. That said, the company sports a robust net margin of 17.69%. As well, it enjoys fiscal stability, as evidenced by its Altman Z-Score of 5.3.
Inflation Resistant Stocks: Microsoft (MSFT)
At first glance, technology giant Microsoft (NASDAQ:MSFT) may appear out of place regarding inflation resistant stocks. However, the company has become so indelible in the academic and professional realms that irrespective of the market and economic forces, MSFT should be a relatively safe idea. True, no market idea offers any guarantees. However, faced with various uncertainties, I like my chances with Microsoft.
With its dominance of the desktop operating system market – commanding 68.15% market share as of June 2023 – a harsh reality exists in the PC world. Whether you like competing operating systems or not, you must demonstrate fluency with Microsoft Windows. That’s what the world runs on and will probably stay this way.
Especially in a recession or an otherwise tough economic circumstance, you want to be marketable. Not knowing Windows doesn’t help, indirectly making MSFT one of the inflation battle stocks. To be sure, MSFT isn’t a discount anymore. Nevertheless, investors can bank on strong revenue growth and consistent profitability.
DTE Energy (DTE)
Based in Detroit, Michigan, DTE Energy (NYSE:DTE) is a diversified energy company involved in the development and management of energy-related businesses and services in the U.S. and Canada. Per its public profile, its operating units include an electric utility serving 2.2 million customers and a natural gas utility serving 1.3 million customers in its home state. Therefore, it’s one of the inflation resistant stocks thanks to its permanent relevance.
While I don’t want to necessarily dive into cynical arguments all the time, DTE and other utility providers make a powerful case for smart stocks during inflation. Basically, you can’t turn your back on your utility bills unless it’s the end of the road. For instance, discretionary purchases like high fashion or fancy restaurants are easy to give up. You just can’t say that about electricity.
On paper, DTE Energy doesn’t seem like a compelling idea. With an Altman Z-Score of 1.15, the company signals a higher-than-average bankruptcy risk. That said, it offers solid revenue growth and consistent profitability, just like you’d expect from a utility.
American Water Works (AWK)
Another public utility, American Water Works (NYSE:AWK) easily ranks among the inflation resistant stocks to consider. Similar to DTE Energy above, households can’t afford to ignore their utility bills, especially for critical services. Otherwise, if circumstances are that bad at a large scale, you’re looking at far bigger problems than deciphering which securities will rise higher.
According to its public profile, American Water offers water and wastewater services to approximately 1,700 communities in 14 states serving a population of approximately 14 million through 3.4 million customer connections. Since the beginning of this year, AWK slipped more than 3%. However, in the week ending July 21, shares gained 2.5%, perhaps on its permanent relevance amid worrying global stability threats.
For full disclosure, AWK runs hot. For example, shares trade at a forward multiple of 31.12 times, above the sector median of 16.13X. That said, it sports a net margin of 21.4%. Also, the company printed 10 years of profitability over the trailing decade.
A company that basically sells itself as one of the inflation resistant stocks, Kroger (NYSE:KR) sits on an unavoidable reality: everyone has to eat. You can talk all you want about rising innovations such as artificial intelligence. It’s unlikely that we’ll ever get to a point where we can replace our need for sustenance. So, from that end, KR offers a relevant idea no matter what happens next.
Also, Kroger benefits from being near the lowest rungs of the trade-down effect. When faced with financial pressures, consumers typically don’t quit their expenditures cold turkey. Instead, they trade down until reaching an acceptable price-to-quality equilibrium for their desired purchases. Well, with basic sustenance, you can’t really trade down from Kroger without perhaps compromising your health.
On a financial note, KR stock makes a lot of sense because of its value proposition. Right now, the market prices KR at a forward multiple of 10.65. In contrast, the sector median stat stands at a loftier 16.54x. Also, KR trades at a revenue multiple of 0.23 times, ranking favorably lower than 70.43% of the competition.
For the last idea regarding inflation resistant stocks, I’m going to go the speculative route with freelance professional marketplace Fiverr (NYSE:FVRR). Given the volatility and choppiness of FVRR stock, I can appreciate the hesitation. After all, the security’s 52-week range runs from $24.58 to $47.66. And during the trailing year, FVRR lost nearly 21% of its equity value.
If speculation isn’t your thing, the other six ideas make for better smart stocks during inflation. However, I appreciate Fiverr as a narrative because of the uncertainties of the labor market. If inflation continues to rise, hard-hit consumers may spend less, impacting broader business sentiment. However, if excessive disinflation materializes from higher borrowing costs, mass layoffs could be the norm.
Either way, the freelance market – otherwise known as the gig economy – may rise from the ashes. Under this framework, FVRR could be one of the top inflation battle stocks. Still, Fiverr is geared for growth, not consistent profitability so it will be a risk.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.