Three stocks to own during inflation

Walmart, a retail giant in the United States, sells a diverse selection of general merchandise and grocery items. (Photo: 123RF)

Unbridled inflation has pushed up the prices of commodities, be they groceries, gasoline or other household items, consuming a large chunk of consumer budgets. In the United States, annual consumer prices rose 9.1% in June, the fastest increase in more than 40 years. The same is true for Canada, where the increase is 8.1%.

Still, for retailers and consumer goods companies in general, inflation is a good thing; higher prices mean higher retail value. One way for investors to offset the corrosive effects of inflation on their wallets is to add some of these companies to their investment portfolio.

The following chain stores are top names to consider. Consumers might cut back on spending, but they will still need these companies’ goods and services, making these stocks one of the best defensive choices to hold in a variety of market conditions, including bear markets.

Target (TGT, $154.90)

Target, a large general merchandise retailer in the United States, offers a variety of products across multiple categories: beauty and home (26% of sales in 2021), food and beverage (19%), furniture and decor (Nov %), Durable Goods (18%) and Clothing & Accessories (17%).

The company is also strong in e-commerce, which accounts for around 19% of its sales.

In response to changing consumer behavior due to overheated inflation, Target announced an all-new list of back-to-school benefits and promotions. The retailer has increased the student discount to 20% and extended its teacher prep event by nearly six weeks.

“Target has adapted to the digitization of retail, but we believe it faces an extremely competitive environment where switching costs for customers are negligible,” according to a Morningstar stock report, which highlights the retailer’s vulnerability to could be a competitive offensive.

Still, the company’s effort (started in 2007) to renovate its stores and use them as multi-network fulfillment centers is impressive. “It should remain in a better position than its peers, particularly given its cost-cutting and the brands it owns,” said Morningstar equities analyst Zain Akbari.

Though Target’s sales have skyrocketed since the pandemic began, this more volatile inflationary environment could weigh on revenue and profits, says Akbari, who recently slashed the stock’s fair value by $171 to $166.

This decision was prompted by “Management’s plans to focus more actively on optimizing stock levels through rebates, liquidations and other measures aimed at resolving the recent imbalance in its range caused by changes in habitual consumer spending due to runaway inflation,” he added.

Kroger (KR, $46.84)

Kroger, the largest food company in the United States, operates various banners across the United States. About 83% of the shops have pharmacies and almost 60% also sell petrol. The company also operates 120 fine jewelry stores.

Although industry-specific factors erode its competitive position, Kroger continues to benefit from enduring intangibles and cost advantages. “Of all traditional grocers, Kroger is uniquely positioned to defend its returns against a competitive onslaught, which is expected to intensify as Amazon, big box stores and deep discounters aggressively price their stores to boost their sales,” reads one Morningstar Stock Report.

Kroger’s local scale in the market allows it to lower its costs, which encourages competitive pricing and allows for the funding needed to expand its presence on emerging networks. “Progress should be accelerated through partnerships with Walgreens, Microsoft and others, which we believe are unavailable to smaller competitors because they cannot provide the same value to counterparties,” Mr. Akbari said.

Kroger’s extensive collection of consumer data is expected to play a large role in its digital transformation. “We believe data will play a critical role in retailers’ efforts to dominate traffic, efficiency and conversion, and anticipate that the long, close relationship with its many customers (96% of sales are with connected to card loyalty) has created a monetizable asset few companies can match,” said Akbari, who recently increased the stock’s fair value from $43 to $47.50.

Additionally, he adds, Kroger’s ability to drive down distribution costs, its investments in multi-channel products, and its supply chain capabilities should allow it to continue to outperform its peers operating in an industry.

Walmart (WMT, $130.46)

Walmart, a retail giant in the United States, sells a diverse selection of general merchandise and grocery items. The United States accounts for 82% of sales, while Mexico and Central America (6%) and Canada (4%) are the largest external markets. About 56% of the company’s sales come from groceries, 32% from general merchandise, and 11% from health and wellness items. In addition to the website of the same name, the company also operates several e-commerce offerings such as Flipkart and shoes.com. Walmart also owns about 10% of Chinese online retailer JD.com.

The company’s major economic moat stems from its intangible assets and sustained cost advantage. “With unrivaled scale, tremendous purchasing power, strong branding and a growing e-commerce platform, Walmart is the only U.S. retailer that can compete with Amazon’s retail products on every level,” according to a Morningstar stock market report.

Though the retail environment is intensely competitive, Walmart’s scale gives it a cost advantage it can use to keep prices down. “Walmart should be able to offer aggressive competition, especially for the roughly 50 million households that aren’t Amazon Prime subscribers, a proposition fleshed out by the launch of the Walmart+ membership program,” Akbari said.

With the U.S. business growth era arguably over, Walmart has reallocated its capital to build infrastructure that can help it deliver mid-double-digit business growth for many years to come.

“The traditional of its network should be difficult to achieve, but we suspect the grocery store’s strength will drive traffic from its customer base, allowing it to leverage its costs and investments in automation and infrastructure,” says Akbari, who recently reduced the fair value of the stock from $152 to $138, reflecting greater than expected margin pressure amid rising inflation.

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