Stocks to buy

While 2022 represented the year that saw inflation spike higher, the subsequent monetary tightening actions by the Federal Reserve cooled demand for the best stocks for inflation. However, a surprise threat from abroad – namely, the oil production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and non-member oil-producing nations – risk sending prices northward once again.

True, the Fed could respond with even more monetary tightening. However, its hawkish policies over the trailing year appear to have made their impact. The latest employment opportunities data demonstrates that fewer positions are available from the prior count. Therefore, additional tightening could threaten a hard landing for the economy.

It’s possible, then, that the Fed could be gingerly about its next policy actions (or do nothing at all). That might raise prices, which then may cynically bode well for these best stocks for inflation.

CL Colgate-Palmolive $75.14
FIVE Five Below $216.72
SRE Sempra Energy $155.29
GO Grocery Outlet $28.88
COST Costco $493.83
DG Dollar General $216.76
MCY Mercury General $33.13

Colgate-Palmolive (CL)

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A multinational consumer goods giant, Colgate-Palmolive (NYSE:CL) is one of the more sensible ideas among best stocks for inflation. Essentially, good times or bad, everyone needs to brush their teeth (or at least they should). Further, it’s always possible that consistent brushing may reduce chances of expensive dentist visits. To be clear, that’s not dental advice – just common sense.

Financially, CL stock intrigues because of its stable nature. While it doesn’t offer the best metrics ever, CL keeps you in the game. For example, Colgate’s Altman Z-Score pings at 6.54, reflecting high stability and low risk of bankruptcy in the next two years. Operationally, it gets the job done with a three-year revenue growth rate of 5.5%, which is right in the middle.

However, Colgate does benefit from strong profitability. Its net margin comes in just under 10%, outpacing 79.57% of its peers. Finally, Wall Street analysts peg CL as a consensus moderate buy. Their average price target stands at $79.13, implying almost 5% upside potential.

Five Below (FIVE)

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A popular chain of specialty discount retailers, Five Below (NASDAQ:FIVE) ranks a cut above your typical dollar store. Here, Five Below sells most products for five bucks or less. As well, the company features a collection of intriguing merchandise priced from $6 to $25. Since the Jan. opener, FIVE gained more than 20% of its equity value. In the trailing year, it’s up by almost 22%.

As one of the best stocks for inflation, Five Below may still have some legs left. On the balance sheet, the company enjoys a solid Altman Z-Score of 5.42. Operationally, the retailer’s three-year revenue growth rate comes in at 18.8%, outpacing 81.51% of its peers. Also, its EBITDA growth rate during the same period is 18.6%.

Better yet, Five Below is highly profitable. Its net margin is 8.5%, above 81.7% of companies in the cyclical retail industry. Lastly, covering analysts peg FIVE as a consensus strong buy. Their average price target is $220.89, implying nearly 7% upside potential.

Sempra Energy (SRE)

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As a public utility firm, Sempra Energy (NYSE:SRE) benefits richly from a natural monopoly. Basically, the barrier to entry in the utility space is so steep that most would-be competitors don’t even try. In addition, Sempra targets large swathes of the lucrative Southern California market. Symbolizing a sizable component of the economic engine of the U.S., SoCal makes SRE one of the best stocks for inflation.

On a relative basis, you might say SRE is still undervalued. Since the Jan. opener, shares only gained a bit over 1%. In the past 365 days, it gave up almost 9% of its equity value. Admittedly, the financial prospects don’t seem appealing. Technically, its Altman Z-Score of 1.07 indicates a distressed enterprise.

Here’s the thing: utilities typically don’t feature outstanding financial metrics. But for Sempra’s case, it’s profitable, enjoying a net margin of 14.8%. In closing, analysts peg SRE as a consensus moderate buy. Their average price target comes in at $168.11, implying over 8% upside potential.

Grocery Outlet (GO)

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Fundamentally, Grocery Outlet (NASDAQ:GO) makes perfect sense as one of the best stocks for inflation. A discount closeout retailer, Grocery Outlet offers deeply discounted, overstocked and closeout products from name brands and private label suppliers. Obviously, with most households hurting from higher grocery prices, a business like Grocery Outlet should flourish.

So far, though, GO has been disappointing. Since the Jan. opener, GO slipped by 3%. In the last year, it’s down by an alarming 22%. Admittedly, some of the pensiveness centers on the company not being so fiscally sound. For instance, its Altman Z-Score pings at 2.6, which sits in the grey zone of stability. Also, Grocery Outlet’s three-year revenue growth rate of 4.5% is middling.

However, one attractive metric is its gross margin. At 30.52%, the company beats out 72.58% of the competition. Turning to Wall Street, analysts peg GO as a consensus moderate buy. Their average price target comes out to $30.56, implying 10% upside potential.

Costco (COST)

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If you’re looking for one of the best stocks for inflation from both an investor and consumer perspective, look no further than Costco (NASDAQ:COST). You can read my take on the topic at TipRanks if you wish. However, the bottom line is that Costco’s business encourages bulk shopping. That’s one of the most effective mechanisms to “beat” inflation. Also, the company caters to a wealthier demographic, insulating the brand from some headwinds.

Financially as well, Costco delivers the goods. Up top, the retailer’s cash-to-debt ratio is 1.5 times, ranked better than 71.81% of its peers. Also, its Altman Z-Score pings at a lofty 7.24. Operationally, Costco enjoys an outstanding three-year revenue growth rate of 14%. Its EBITDA growth rate during the same period is 15.4%, besting 63.16% of the field. Also, its net margin is 2.58%, above 62.46% of rivals.

Looking to the Street, analysts peg COST as a consensus moderate buy. Their average price target stands at $550.33, implying over 13% upside potential.

Dollar General (DG)

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A chain of variety stores, Dollar General (NYSE:DG) is an obvious choice for best stocks for inflation. One of the most popular dollar stores, Dollar General may be somewhat of a cynical play. With rising prices and hurting consumers, people will look to the retailer to help make ends meet. Thus, demand should swing higher.

For now, though, DG stock finds itself down nearly 14% since the beginning of the year. In the past 365 days, it’s down to nearly the same magnitude. However, eventually, Dollar General enjoys a path forward from the malaise. In particular, the company’s three-year revenue growth rate pings at 15.9%, above 88.26% of the competition.

On the bottom line, the firm’s net margin is 6.38%, outpacing 87.38% of rivals in the defensive retail industry. Finally, analysts peg DG as a consensus moderate buy. Their average price target stands at $241, implying over 13% upside potential.

Mercury General (MCY)

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Under the context of best stocks for inflation, Mercury General (NYSE:MCY) enjoys a straightforward narrative. Given the vagaries of life, everyone should get insurance coverage. Further, since the Covid-19 crisis, the roads have gotten much more dangerous. Thus, it makes sense for people to protect their financial wellbeing.

Despite the common-sense nature of Mercury, MCY slipped 5% since the start of the year. Moreover, in the trailing one-year period, shares stumbled over 40%. To be fair, Mercury could use some help in the financials, ironically enough. Perhaps most glaringly, its three-year revenue growth rate sits at 2.9% below breakeven.

However, the pandemic did a number on Mercury’s business. Moving forward, the narrative should be much more appealing. Notably, Raymond James’ analyst Charles Peters is willing to give Mercury a chance, pegging MCY as a buy. The expert’s price target comes out to $45, implying 38% upside potential.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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