On Tuesday, the market grappled with the news that the U.S. Consumer Price Index (CPI) revealed inflation rising faster than anticipated in January. As cost of housing increased by 0.6%, it underscored the ongoing strength of underlying inflation pressures. Initially, investors had anticipated a Fed interest rate cut in May, a notion that has now been postponed to June in light of the recent fiscal developments. These hawkish inflation figures set off a chain reaction, causing the Dow Jones Industrial Average (DJIA) to endure its worst day since March 2023, and the Russell 2000 to shed 4%. U.S. bond yields climbed to 4.32%, and major technology stocks experienced a palpable downturn.
The reaction following the CPI report underlines just how vulnerable stock prices are to inflation. The diminishing consumer spending power, owing to higher prices, translates to reduced demand and an adverse impact on most companies. The burgeoning inflation is more likely to lead the Fed to maintain high interest rates for an extended period, presenting challenges to stock valuations amid increased borrowing costs. Therefore, when looking for inflation-resistant stocks, it is imperative to analyze factors linked to demand-side economics and monetary policies.
In light of this, it’s important to recognize that certain businesses stand to benefit from a high-inflation environment. Discount grocery stores, for instance, tend to attract customers seeking cost-effective options, while companies in the utility sector are better positioned to pass on increased costs to consumers.
CF Industries (CF)
One company that stands to benefit from record-high fertilizer prices is CF Industries (NYSE:CF), a U.S. fertilizer company. The company’s supply chain is currently impacted by sanctions on Russia and disruptions due to the conflict in Ukraine. These issues are further compounded by trade disruptions and increased transport costs stemming from the Red Sea crisis. Significantly, fertilizer supplies were already constrained prior to these geopolitical events, indicating that price pressures may continue to be elevated.
CF Industries boasts a low price-to-earnings (PE) ratio of just 7.2x, along with an attractive dividend yield of 2.6%. This compares favorably to the S&P 500’s average PE ratio of 27.3x. As a testament to its robust financial health, the company recently announced a 25% increase in its dividend. Consequently, it emerges as an attractive inflation-resistant stock poised to perform well in periods of high inflation.
Merck (MRK)
Merck (NYSE:MRK), a major pharmaceutical company involved in developing drugs to treat cancer and other diseases, generates significant revenue from its shingles vaccine. Analysts expect the company’s earnings to increase by a substantial 180% this year as the healthcare sector continues its post-pandemic recovery.
All 21 analysts tracking Merck stock recommend a Hold rating or higher. With an average target price of $133.78 per share, well above the current $125, MRK appears well-positioned as an inflation-resistant stock backed by solid fundamentals and analyst support.
AT&T (T)
The telecommunications giant AT&T (NYSE:T) has been under pressure partly due to high debt levels in recent times. However, through aggressive debt repayment, it has considerably reduced leverage over the past year despite rising interest rates. The company continues to report steady revenue growth and forecasts that free cash flow will be more than sufficient to cover its dividend payments.
AT&T trades at a low PE ratio of just 8.6x, significantly below the telecom sector’s average of 28x. Remarkably, it still offers an attractive dividend yield of 6.6%, even after reducing its payout two years ago to focus on debt repayment. Analysts have a consensus target price of $19.35 per share, indicating further upside. AT&T stands out as another inflation-resistant stock.
