7 Stocks That Can Survive a Bumpy Ride to Low Inflation

Stocks to buy

Throughout 2022, investors quickly recognized that success for stocks to buy centered on entities that could ride out rising prices. Now, investors may need to strategize for the opposite scenario: the Federal Reserve continuing to hike benchmark interest rates to get inflation under control. Unfortunately, that might mean struggling through deflationary forces to get to low inflation.

It just comes down to a math problem. In order for high inflation to come down to low inflation, some deceleration must occur, which would be relatively deflationary. By logical deduction, investors should consider stocks to buy that may perform decently well during cycles of declining prices.

While no one knows what the Fed might do, the latest Consumer Price Index report came in slightly higher than expected. In addition, China’s economic reopening would translate to greater commercial activity, which is positive. However, it also means greater resource consumption, leading to higher prices. Therefore, it’s important to consider stocks to buy that may ride out the Fed’s hawkish strategy.

FIVE Five Below $210.47
DG Dollar General $227.82
ALL Allstate $135.05
WTRG Essential Utilities $46.15
SRE Sempra Energy $158.49
ADM Archer Daniels Midland $81.59
PSX Phillips 66 $99.54

Stocks to Buy: Five Below (FIVE)

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With the Fed signaling that its top priority centers on controlling inflation, investors may want to target relatively upscale discount retailer Five Below (NASDAQ:FIVE). Unlike literal dollar stores, Five Below carries prices up to its namesake price. As well, it features a select range of products that can go up to $25. Therefore, the company provides several compelling products that should appeal to a broader consumer base.

Fundamentally, Five Below may buffet the storm of the higher rates necessary to bring inflation down to a low level. Basically, the classical definition of inflation is a circumstance where more dollars chase after fewer goods. With deflation, fewer dollars chase after more goods. But to get deflation, a central bank must usually crimp demand, which would hurt the labor market. Unfortunately, this dynamic suggests that consumers must make do with less. However, such a framework would likely benefit Five Below. Therefore, FIVE stands among the stocks to buy.

Stocks to Buy: Dollar General (DG)

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Under a similar philosophy to Five Below above, Dollar General (NYSE:DG) presents an effective name among stocks to buy. True, Dollar General might typically be an idea to mitigate the impact of ever-rising prices. However, the dollar store can also perform relatively well under deflationary forces. Again, such a condition implies a negative impact on the workforce, which means discount retailers will gain tremendous relevance.

What I appreciate about DG as one of the stocks to buy ahead of the Fed’s potentially hawkish measures is its objective discount. According to Gurufocus.com’s DCF analysis, DG represents a modestly undervalued investment. Specifically, the investment resource calculates the fair value at $273.35. However, the market priced DG at $227.82 at the time of writing.

Also, Dollar General benefits from excellent operational strengths. Its three-year revenue growth rate stands at 14.6%, outpacing 86.57% of the competition. Also, its net margin pings at 6.49%, beating out more than 87% of its peers. Turning to Wall Street, analysts peg DG as a consensus moderate buy. Further, their average price target stands at $264.93, implying over 16% upside potential.

Stocks to Buy: Allstate (ALL)

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For the Fed’s efforts to contain inflation, Allstate (NYSE:ALL) is an excellent candidate for stocks to buy. And that’s because whether we’re talking inflation, deflation, or some other kind of “flation” – including the dreaded stagflation – Allstate delivers. It has to be because the company benefits richly from a hostage audience.  For instance, almost every state in the Union requires auto drivers to carry at least liability insurance. Further, those rare jurisdictions that allow people to drive sans insurance must demonstrate proof of financial wherewithal. Basically, it’s just better to carry insurance, primarily because of the fear of the unknown.

Plus, when the smelly stuff hits the proverbial fan, insurance pays. I mean, it can really save your hind end, even with a hefty deductible. In exchange for hundreds of dollars, you’ll spare yourself the pain of tens of thousands of dollars.

Finally, Wall Street analysts peg ALL as a consensus moderate buy. In addition, their average price target stands at $142.31, implying over 5% growth. With a dividend yield of 2.52%, Allstate may be boring but it gets the job done.

Essential Utilities (WTRG)

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Against a longer-term framework, arguably most people understand (and perhaps appreciate) what the Fed’s doing. If inflation continues to rise out of control, the economy may suffer substantial damage. However, getting to the point of low inflation is a major pain. To mitigate the possible incoming volatility, investors should consider Essential Utilities (NYSE:WTRG) as one of the stocks to buy.

A drinking water and wastewater treatment infrastructure and service provider, Essential Utilities carries the underlying sector’s major advantage: a natural monopoly. Due to the extraordinarily high barrier to entry, few entities can compete with Essential. Cynically, this dynamic bodes very well for WTRG stock.

According to Gurufocus.com’s proprietary calculations for fair market value (FMV), WTRG rates as modestly undervalued. Objectively, the company enjoys excellent operational stats. Its three-year revenue growth rate stands at 15.7%, ranking better than 80.7% of its peers. Also, its net margin pings at 22%, above nearly 88% of the sector. Lastly, Wall Street analysts love WTRG, pegging it a unanimous strong buy. Moreover, their average price target stands at $53.25, implying over 15% upside potential.

Sempra Energy (SRE)

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As with Essential Utilities above, Sempra Energy (NYSE:SRE) ranks among the stocks to buy because of its natural monopoly advantage. Despite Sempra’s customers complaining up a storm about its business practices over the years, no one can replace it. Nor can anyone provide an alternative: the barrier to entry simply rates well above most enterprises’ pay grade, particularly in California.

Speaking of the Golden State, Sempra’s other advantages center on its geographic location. Covering much of Southern California, Sempra benefits from an economic powerhouse of the biggest engine of the U.S. While people complain about California and its high prices, the state continues to attract top-tier talent. Frankly, it’s too important of a region to ignore. Plus, when you’re dealing with such a lucrative market, the customers’ ability to pay becomes less of an issue. That’s something to keep in mind for stocks to buy as the Fed targets low inflation.

Finally, Wall Street analysts peg SRE as a consensus moderate buy. Their average price target of $172.50 implies nearly 9% upside potential.

Archer Daniels Midland (ADM)

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A multinational food processing and commodities trading company, Archer Daniels Midland (NYSE:ADM) is one of the stocks to buy as the Fed attempts to spark low inflation. Because of the core necessity of the underlying sector, ADM can rise irrespective of fluctuating monetary cycles. After all, humans must eat, irrespective of what’s going on with the interest rate environment.

Notably, ADM gained over 6% in the trailing year. In contrast, the benchmark S&P 500 index slipped more than 5% during the same period. Part of its resilience stems from its passive income. Presently, the company carries a forward yield of 2.21%. As well, the enterprise commands 51 years of consecutive annual dividend increases. That’s a status management won’t give up on without a major fight. Convincingly, Wall Street analysts peg ADM as a consensus strong buy. As well, their average price target stands at $104.20, implying upside potential of nearly 28%. Thus, ADM ranks among the top stocks to buy for the rough journey to low inflation.

Phillips 66 (PSX)

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A hydrocarbon energy giant, Phillips 66 (NYSE:PSX) specializes in the downstream component of the sector’s value chain. This involves refining and marketing. Fundamentally, Phillips 66 benefits from purchases of necessity. While the electric vehicle revolution may be occurring right now, the vast majority of people drive combustion-powered cars. Thus, PSX will stay relevant for quite some time.

In the trailing year, Phillips 66 shares gained over 18% of equity value. Since the January opener, though, they slipped about 1.5%. However, this might be a buying opportunity as provides a compelling case from a passive income perspective. Right now, its forward yield stands at 4.22%. Moreover, it’s a stable yield thanks to its low payout ratio of 32.66%.

Financially, PSX trades at a trailing multiple of 4.34. As a discount to earnings, the oil firm ranks better than 71.26% of the competition. In addition, it trades at 0.28 times sales. For this metric, Phillips 66 ranks better than 81.39% of sector peers. Thus, it’s a compelling example of stocks to buy for the low-inflation journey.

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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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