10 Best Stocks to Buy as Stagflation Fears Grow Ahead of CPI Report

 | May 09, 2023 22:27

  • Stagflation remains one of the primary risks for the global economy in 2023.
  • The stock market’s trajectory will continue to be dictated by worries over persistently high inflation and fears of an impending recession.
  • As such, I highlight ten companies that are relatively safe amid the looming threat of stagflation thanks to their strong fundamentals, reasonable valuations, and healthy dividend payouts.
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    • Worries over stagnant economic growth and consistently high inflation will likely be the primary drivers of market sentiment in the months ahead.

    Such an environment is referred to as ‘stagflationary’ and may occur if a recession is triggered before inflation is limited to where the Federal Reserve wants it to be.

    In general, energy, utilities, healthcare, and consumer staples are some defensive sectors that perform well during stagflation. In contrast, their cyclical counterparts, like technology, financials, and industrials, tend to underperform.

    I used the InvestingPro stock screener , I ran a methodical approach to filter down the 7,500-plus stocks listed on U.S. exchanges into a small actionable watchlist of established companies expected to provide investors with solid returns, regardless of economic conditions.

    My focus was on well-diversified, defensive companies with solid profitability, a healthy balance sheet, high free flow, strong growth prospects, and an attractive valuation.

    More importantly, I wanted to identify stocks that offer resilient dividend payouts and have proven that they can sustain a slowing economy thanks to their market-leading position over time.

    As such, I first scanned for names with a dividend yield above 3% and a greater than 10% return on invested capital (ROIC), which is a capital efficiency ratio used to measure a firm's ability to create value for all its stakeholders.

    Essentially, these two metrics show how well a company uses its capital to generate profits.