Although 2022 started on a hopeful note, given the intense rise in equity valuations in the prior year, market participants soon realized that circumstances would be incredibly difficult. More recently, the convergence of several macroeconomic headwinds seems to give stagflation risks unfortunate credibility. To combat this potential threat, investors should look for stocks with resilient business profiles. Stocks like Sempra Energy (NYSE:SRE) and Kroger (NYSE:KR) may provide protection from the storm.
If the year so far could be described in one word, whatever it is, it’s sure to meet competing candidates. Nevertheless, inflation represents a pivotal theme that has affected virtually every American. Fundamentally, the excesses of the post-pandemic new normal – mainly unprecedented fiscal and monetary stimulus programs – dramatically expanded the money supply. Now, the Federal Reserve has the unenviable task of unwinding the party by raising the benchmark interest rate.
However, the erosion of purchasing power under inflationary cycles did offer one positive framework for stocks to buy. Effectively, the dynamic forced cash holders to do something with their money: either spend it or invest it. Sitting on cash would result in gradual wealth erosion.
On the flip side, the Fed’s hawkish pivot will, all other things being equal, bolster the dollar’s purchasing power. This circumstance creates an incentive for people to sit on cash, as apathy would yield wealth expansion. Therefore, stocks to buy of a risk-on nature faltered under the Fed’s pivot. Essentially, doing nothing guarantees net wealth upside.
However, with the Organization of the Petroleum Exporting Countries and its non-member allies – a cartel known as OPEC+ – deciding to cut crude oil production by two million barrels per day, the U.S. economy faces the prospect of higher energy prices and reduced economic activity due to the Fed’s actions cooling the labor market. That translates to stagflation, a circumstance that no central bank wants to face.
Still, the collision of various factors might leave the Fed with no other avenue to traverse. Therefore, investors should consider the below relevant stocks to buy to protect against stagflation.
Sempra Energy
A utility firm with a strong presence in Southern California, Sempra Energy benefits from two fundamental catalysts. First, it enjoys inelastic demand. No matter what happens in the economy, people must have access to a baseline consumption of energy services. Therefore, the lights will stay on at Sempra, literally and figuratively.
Second, Sempra enjoys a geographical advantage that ties into an economic advantage. In 2021, California generated about $3.36 trillion in GDP. The Golden State represents the economic engine of the U.S. with its warm-weather ports and easy access to Mexico as a trading partner, comprising a significant role in the state’s vitality.
Not surprisingly, while the major equity indices fell double digits on a year-to-date basis, SRE is up over 10% during the same period. Sempra probably won’t make investors rich, but it will likely keep their portfolios afloat.
Financially, Sempra features a fairly valued business profile. Frankly, the company could use some shoring up of its balance sheet. In addition, it’s somewhat middling in terms of growth, although Sempra enjoys a three-year book value growth rate of 13.4%, which rates better than 83% of its peers. However, its main strength stems from profitability. The company’s operating margin is 21.3%, exceeding the industry median of 13.6%.
Is SRE a Good Stock to Buy?
Turning to Wall Street, SRE stock has a Moderate Buy consensus rating based on six Buys, three Holds, and zero Sells assigned in the past three months. The average SRE price target is $175.63, implying 20.5% upside potential.
Kroger
A grocery store giant, Kroger benefits from two fundamental catalysts. First, the company also enjoys inelastic demand but with far greater urgency. Biologically speaking, humans must take in a minimum amount of calories to survive. Therefore, relative to the baseline of consumption, Kroger will command predictable and dependable revenue.
Second, Kroger is a consumer staple rather than a consumer discretionary name. Undeniably, the poor forward outlook of some of the world’s top discretionary retail specialists indicates that people are shying away from nice-to-have-but-unnecessary purchases. However, food and water (beverages) are not nice-to-have products but rather must-haves. Therefore, what’s bad for other stocks to buy could handsomely (albeit cynically) reward Kroger.
Similar to Sempra Energy, Kroger represents a fairly valued business. However, the overall profile is much more balanced. For instance, the grocer enjoys greater stability in the balance sheet, marked by an Altman Z-Score of 4.28. This reflects lower-than-average bankruptcy risk.
On the income statement, Kroger features a three-year revenue growth rate of 6.4%. This ranks higher than 64% of the retail defensive industry. For profitability, the company has a return on equity of 25.6%, ranked better than nearly 85% of its peers.
Is KR Stock a Buy or Sell?
Turning to Wall Street, KR stock has a Hold consensus rating based on one Buy, seven Holds, and two Sells assigned in the past three months. The average KR price target is $52.30, implying 14.7% upside potential.
Takeaway: SRE and KR Stocks Offer Stability During Uncertain Times
Over the long run, time in the market will likely beat out timing the market. Therefore, consistent participation may be pivotal. Nevertheless, exposure to risk-on names could be too much for some. For those wanting a conservative approach, the above stocks to buy offer a mixture of relevance and stability.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
