Investors spooked by the latest red-hot readings on inflation should know that a handful of market sectors have historically not only afforded them safety amid rapidly rising prices, but have actually delivered outright outperformance.
True, every sector of the market is down for the year-to-date except for financials and energy. But the long-term data suggest it’s only a matter of time before the best stocks in the most inflation-resistant sectors come roaring back.
A study of U.S. equity sector performance amid rising inflationary environments revealed that from 1973 through 2020, five of the S&P 500’s 11 sectors offered solid to strong performance.
Indeed, over that time span, the healthcare, consumer staples, utilities, equity real estate investment trust (REIT) and energy sectors generated 12-month inflation adjusted returns of anywhere between about 2% and 10%, according to Sean Markowicz, a research and analytics strategist at Hartford Funds.
Some folks might wonder why the materials sector didn’t make the list, given that gold is thought to be a hedge against inflation. Well, guess again.
“Although gold is often touted as a hedge against currency debasement fears, the track record for companies in the precious metals and mining sector is mixed,” Markowicz writes.
With this evidence in hand, we screened the S&P 500’s five best sectors for inflation one by one, using data from S&P Global Market Intelligence. We then singled out the top-rated stock in each sector by analysts’ consensus recommendation.
Have a look at the top stock in each of the market’s five best sectors when it comes to fighting inflation.
Share prices, market data are as of Feb. 9. Analysts’ consensus recommendations courtesy of S&P Global Market Intelligence.
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Consumer Staples: Mondelez InternationalGetty Images
Market value: $94.4 billionDividend yield: 2.1%Analysts’ consensus recommendation: 1.70 (Buy) We’ll start our list of the best stocks for inflation with Mondelez International (MDLZ, $67.96). Shares have held up as an inflation hedge, at least so far in 2022, rising 2.5% for the year-to-date through Feb. 9, vs. a drop of 3.8% for the S&P 500.
Mondelez’s vast portfolio of snacks and foods include Oreo cookies, Milka chocolates and Philadelphia cream cheese, to name a few. Sales of such consumer favorites tend to hold up well amid rising prices thanks to fickle palates and brand loyalty.
Where MDLZ stands out among analysts, however, is in its ability to handle higher input costs thanks to a longstanding hedging program. The company also has been successful in passing higher costs on to consumers.
Then there’s the easing of the pandemic. The gradual unwinding of snarled global supply chains and increased consumer mobility – such as increased travel and the return to office work – should also support MDLZ in 2022.
“Market share gains and exposures to categories that stand to benefit from steadily improving global mobility are reasons to remain constructive on MDLZ as a reopening story,” writes UBS Global Research analyst Sean King, who rates the stock at Buy.
UBS is in the majority on the Street, which gives MDLZ a consensus recommendation of Buy. Of the 23 analysts covering the stock tracked by S&P Global Market Intelligence, 12 rate it at Strong Buy, seven say Buy, three have it a Hold and one calls MDLZ a Sell.
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Energy: ConocoPhillipsGetty Images
Market value: $121.0 billionDividend yield: 1.5%Analysts’ consensus recommendation: 1.57 (Buy) Like the energy sector as a whole, ConocoPhillips (COP, $92.95) had a fantastic 2021 and is off to an even better 2022. Shares in the independent oil & gas exploration and production company are up close to 30% so far this year, and the Street says they have plenty more to give.
Indeed, rising energy prices have analysts extremely bullish on the name. Sixteen pros call COP a Strong Buy, eight rate it at Buy and four have it at Hold, per S&P Global Market Intelligence.
“We believe that a company’s balance sheet strength and place on the cost curve are critical, and favor those E&P’s that are well positioned to manage a potentially long period of volatile oil prices,” writes Argus Research analyst Bill Selesky (Buy). “We believe that COP is one of these companies, as it benefits from its size, scale, and combination of both long-cycle and unconventional short-cycle projects.”
The analyst adds that COP is distinguished by its “record of disciplined investment, strong free cash flow and consistent returns of cash to shareholders through dividends and stock buybacks.”
The Street forecasts the oil company to generate average annual earnings per share (EPS) growth of 7% over the next three to five years.
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Utilities: AESGetty Images
Market value: $15.3 billionDividend yield: 2.8%Analysts’ consensus recommendation: 1.50 (Strong Buy) AES (AES, $22.98) operates a diversified range of power plants, making electricity from fossil fuels including natural gas, coal and oil. It also owns renewable energy facilities, including hydroelectric dams, solar installations, wind farms and even landfill gas reclamation.
Not only does AES come out on top as analysts’ favorite utility stock in the S&P 500; it’s also one of the 12 best utility stocks to buy for 2022.
Of the 12 analysts issuing opinions on the stock tracked by S&P Global Market Intelligence, seven rate it at Strong Buy, four say Buy and one has it at Hold. That gives the name a consensus recommendation of Strong Buy overall.
AES stock is lagging the broader market for the year-to-date, and that makes it a good time to go bargain hunting in the name, bulls say.
“Recent weakness offers buying opportunity,” writes Argus Research analysts Gary Hovis and David Coleman in a recent note to clients. “Our long-term rating remains Buy, as we expect the company’s efficient gas-fired generating units to drive better earnings growth over time.”
The analysts underscore AES’s focus on clean energy, as it “continues to take advantage of favorable trends in clean power generation, transmission and distribution, and LNG infrastructure.”
Ultimately, the bull case rests in AES’s unique ability to benefit from the global transition to more sustainable, environmentally friendly power generation.
With that, the Street forecasts the firm to deliver average annual EPS growth of almost 8% over the next three to five years. That’s pretty darn good for a utility company.
Adding it all up, it’s easy to see why AES is one of the best stocks for inflation.
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Healthcare: IQVIA HoldingsGetty Images
Market value: $48.8 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.32 (Strong Buy) IQVIA Holdings (IQV, $255.57) formerly known as Quintiles and IMS Health, brings technological solutions to healthcare problems. It helps life science, drug-development and even care-provider companies collect and analyze data, then use that data to bring new products to the market.
The Street is increasingly bullish on the name, giving it a consensus recommendation of Strong Buy, up from Buy at this time last year. Of the 19 analysts issuing opinions on IQV, 14 rate it at Strong Buy, four say Buy and one has it at Hold.
BofA Securities analysts (Buy) note that the firm has made significant progress since the 2016 merger of Quintiles and IMS Health.
“The core business is accelerating and heavy investment in information technology is paying off as the clinical trials market evolves to become more decentralized and focused on real world evidence,” writes BofA analyst Derik de Bruin. “Management’s targets for 2022 to 2025 exceeded our expectations, and are above 2019 to 2022 levels, despite meaningful COVID-19 related headwinds and inflationary pressures.”
Indeed, the company’s growth outlook is so strong that the Street expects annual average EPS growth of more than 20% over the next three to five years, making it an attractive target for investors looking at the best stocks for inflation. Meanwhile, the stock trades at just 25.2 times analysts’ 2022 EPS estimate – a valuation the bulls contend is compelling.
Lastly, with an average target price of $304.59, the Street gives IQV stock implied upside of nearly 20% in the next 12 months or so.
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Real Estate: Alexandria Real Estate EquitiesGetty Images
Market value: $30.6 billionDividend yield: 2.4%Analysts’ consensus recommendation: 1.27 (Strong Buy) The real estate sector of the S&P 500 is off to a bad start so far in 2022, and shares in Alexandria Real Estate Equities (ARE, $191.15) haven’t escaped the drawdown.
Rising interest rates might be poisoning sentiment for the sector at the moment, but analysts say equity real estate investment trusts (REITs) are a great place to be when prices are rising.
And no equity REIT in the S&P 500 gets a higher recommendation from analysts than ARE. With a score of 1.27, the Street gives Alexandria Real Estate Equities a consensus recommendation of Strong Buy, with high conviction to boot. Of the 11 pros issuing opinions on the stock, eight call it a Strong Buy and three say Buy, per S&P Global Market Intelligence.
But ARE doesn’t just stand out for being one of the best stocks for inflation. RBC Capital Markets, with a rating of Outperform (the equivalent of Buy), named Alexandria Real Estate Equities to its list of top 30 global ideas for 2022.
“As the largest public life sciences REIT and one of the larger public REITs, we believe ARE will drive healthy organic and external growth with positive leasing trends in its in-service and development portfolios,” writes RBC Capital Markets analyst Michael Carroll. “COVID-19 has increased awareness around the need for life science products and research & development. This could lead to incremental demand.”
Analysts forecast the REIT to generate average annual EPS growth 7.2% over the next three to five years. Meanwhile, their average price target of $232.36 gives ARE implied upside of 22% in the next year or so.