Investors should remember that in times like this the best offense can be a good defense
The rate of US inflation climbed again in January to 7.5% and stayed at a 40-year high. And the consumer price index (CPI) increased by 0.6% which was also above expectations.
This was a case of data outperforming expectations in the worst way. And the markets are reacting in predictable fashion. All the major indexes are down sharply in early trading. The yield on the 10-year Treasury note is approaching 2% and the flight to safety is back on.
Even cryptocurrencies and precious metals are not immune from the sell-off. There’s a message in there to investors. There is panic selling going on as investors now begin to factor in the idea of the Federal Reserve raising interest rates not just three times but perhaps as many as six or seven times this year. And that may start with an unusual, but not unprecedented half-point increase in the benchmark short-term interest rate in March.
Of course, nobody knows what the Fed will ultimately do. So, our advice to you as investors is to continue to play offense. And that means looking to buy stocks from companies that have the pricing power to withstand the effects of inflation.
Here are three companies that will do well in an inflationary environment.
Walmart (NYSE:WMT) - Let’s face it. Many of the same companies that performed well at the onset of the Covid-19 pandemic will do well now. These companies sell the essential items that consumers will purchase regardless of their economic situation. And that means they will have pricing power. With that in mind, Walmart looks like a solid play for a couple of reasons.
First, the company has made great strides in developing its omnichannel business. That was seen as an essential move if the company was to provide Amazon (NASDAQ:AMZN) with true competition. It’s succeeded on that front.
Taking a look at the financials, both revenue and earnings are up year-over-year which is no small accomplishment considering that the economy was reopening in 2021. And with inflation likely to remain at elevated, if not historically high, levels for the remainder of the year. It's never a bad idea to find stocks that pay a reliable dividend. Walmart may not have the most attractive dividend by some metrics. But, the company has increased the dividend for 48 years and shows no signs of ending that streak.
Stocks we also like that have a similar narrative to Walmart include Target (NYSE:TGT) and Costco (NASDAQ:COST).
Stryker (NYSE:SYK) - Medical device companies were the opposite of essential businesses during the pandemic, However, that was for very different reasons. The healthcare sector is only expected to grow as the aging of America continues. And as we age, there will be a rising demand for elective procedures that improve quality of life. And Stryker provides the products and devices that will be part of those elective procedures.
But what surprised us about Stryker and makes the stock a compelling buy is that the company managed to grow both its earnings per share (EPS) and revenue in 2021 over its pre-pandemic levels. And with over 10,000 patents, the company is able to deliver innovations that are protected from its competitors.
SYK looks to have found a bottom after the recent sell-off. And the stock pays a dividend that it’s increased for the last 29 years
Another stock that we like in the medical device sector is Intuitive Surgical (NASDAQ:ISRG). This stock has a similar revenue and earnings story, but does not pay a dividend.
Poshmark (NASDAQ:POSH) - If you’re looking for a small-cap company that may fit your speculative tastes, we’d invite you to consider Poshmark. This is a social commerce marketplace operating in the U.S., Canada and Australia. It was originally established as an online consignment store, but it’s much more than that. Still, community members use site to find bargains on both new and used items.
This hits two sweet spots. First, many of us are spending more of our lives online. The pandemic didn’t change this behavior, it simply accelerated it. And second, if inflation remains elevated as it’s expected to do, consumers will be looking for a bargain to make their dollars stretch farther.
Poshmark doesn’t charge sellers to list items on the platform. But they earn a fee on every sale via its take rate. For items that list for less than $15, Poshmark charges a flat take rate of $2.95. For items above $20, the take rate is 20% of the purchase price.
As a small-cap company there is more risk to POSH stock and it’s not yet profitable. If you go in on this stock at its IPO price, you’re holding a heavy bag. But, if you haven’t taken a position yet, now may be the time.
Investors looking for stocks with a similar narrative, but perhaps with less risk may want to consider Etsy (NASDAQ:ETSY) or Pinterest (NYSE:PINS).