Stock Market Commentary:
Inflation is everywhere in the global economy, and inflation will hang around for some time to come. The inflation problem is so bad that the Federal Reserve does not think inflation will return to its 2% target for another three years. While economists and pundits debate about how long inflation will last, how much exists (sometimes whether inflation really exists), and how it will eventually get resolved, inflation-friendly stocks are rallying and breaking out. Even in retail, inflation-friendly stocks abound. These retailers and retail products are choice picks because either they offer price-shocked consumers a refuge and/or they offer goods which consumers consider necessities. Necessary goods maintain an even more important part of even an inflation-pressured budget.
Of course, the time to buy these inflation-friendly stocks was back when “transitory” and “base effects” were buzzwords shouting out the growing inflationary dangers (“peak inflation” is the latest buzzword comfort food). Now, headlines are constantly screaming about inflation; it is now cool to worry about inflation. Accordingly, most of the stocks below are far out-performing the bearish stock market and are quite expensive relative to the market and themselves. Still, they are worth considering on dips as long as the inflationary environment persists. As a double-bonus, many of these stocks could continue to fare well if the Federal Reserve’s tardy commitment to normalizing monetary policy throws the economy into a recession.
Consumer Staples Select Sector SPDR Fund (XLP)
I made the inflation-friendly case for the Consumer Staples Select Sector SPDR Fund (XLP) in December. I bought shares shortly afterward. I started to wonder whether I missed something as XLP sagged along with the rest of the stock market in March. That dip turned out to be a good time to add to shares. XLP briefly slipped by support at its 200-day moving average (DMA) (the blue line below). XLP has yet to look back since. The ETF finally cracked new all-time highs last week.
Walmart Inc (WMT)
Since making an all-time high in November, 2020, Walmart Inc (WMT) went nowhere for over a year. Two rallies in 2021 failed to challenge the all-time high. The awakening to the inflationary environment finally pushed WMT over the hump. In fact, WMT has rallied nearly straight up from its February lows.
WMT sells at a 32 trailing P/E and 0.8 price-to-sales (P/S). The stock traded as low as a 20 P/E and as high as a 50 P/E following the start of the pandemic. P/S is approaching a 17-year high. Walmart Inc has a 4.5% share of XLP.
Dollar Tree, Inc (DLTR)
I got the dip I wanted in Dollar Tree, Inc (DLTR) right after I made the case for the stock. The run-up from the 2022 lows has been impressive. Buyers have clamored for this discount retailer so much that the upper Bollinger Band (BB) has attracted a lot of the trading action. Last week’s run-up was particularly sharp. Typically I would take profits here, but I think the bullish case remains quite strong. DLTR is a buy on the dips.
DLTR trades at a 29.8 trailing P/E and a 1.5 P/S. The P/E is at its highest point since 2016. DLTR hit as high as 2 P/S from 2012 to 2015. Dollar Tree, Inc is not a component of XLP.
Costco Wholesale Corporation (COST)
Consumers can fight inflation by buying in bulk to save on per unit costs. Stocking up also makes sense if you think prices will be even higher next week or next month. Costco Wholesale Corporation (COST) benefits from both dynamics. COST recently pulled back slightly from its all-time high, but the stock remains comfortably above the former all-time high set in December.
COST sells at a 48 trailing P/E and 1.3 price-to-sales (P/S). The stock set an all-time high P/E in December and is already challenging that level again. P/S is also challenging an all-time high set in December. Costco Wholesale Corporation holds a whopping 11.2% share of XLP. Given I own XLP, I definitely do not need to add COST shares to the mix.
Target Corporation (TGT)
Target Corporation (TGT) technically does not belong on this inflation-friendly stock list. However, TGT closely competes with Walmart, and I noticed TGT broke through 200DMA resistance after considerable churn. I am a buyer on a confirmed 200DMA breakout (a second higher close).
TGT sells at a 16.6 trailing P/E and 1.1 price-to-sales (P/S). The stock’s P/E is near the lower end of its historic range. P/S hit an all-time high back in August at 1.3. In other words, TGT looks like Walmart on a discount. TGT is not a component of XLP.
Hormel Foods Corporation (HRL)
I have had fun comparing Hormel Foods Corporation (HRL) to Beyond Meat (BYND). The two stocks are fully diverging now. HRL hit an all-time high last week while BYND is scraping at all-lows. The weekly chart below demonstrates the staple nature of HRL even as it goes through periods of churn and little progress. Fake meat is truly discretionary. When push comes to shove, I think consumers will still buy beans over fake meat for protein.
HRL sells at a 31.2 trailing P/E and 2.4 price-to-sales (P/S). The stock’s P/E is near its all-time high set in 2016. P/S hit an all-time high of 2.8 in the wake of the pandemic. HRL has a 0.7% share of XLP.
Be careful out there!
Footnotes
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long XLP, long DLTR, long HRL
FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, Twitter, and even Instagram!
*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.
Grammar checked by Grammar Coach from Thesaurus.com