While the Federal Reserve seeks to spark gentle disinflation, it can’t be too soft on accelerating consumer prices either, which is exactly why investors need to consider reliable stocks during rate hikes. Sure, some recent data points to an encouraging backdrop for slowing inflation. However, the central bank can’t lose focus now.
It’s like a baseball game – you could be up a few runs but anything can happen if the opposing bats get hot. A mistake here and a bad pitch there could land you in a bases-loaded type of situation. And then you have the clean-up hitter coming up to the plate. That’s analogous to the circumstances the Fed faces, which is why you need stocks resistant to interest rate increases.
Indeed, Minneapolis Fed President Neel Kashkari refused to say how many more interest rate hikes remain, according to The Hill. Of course, I’m not going to speculate on what policymakers will absolutely do. Still, it would be prudent to adopt a conservative approach considering that the Fed would like to see the benchmark inflation reading lower. With that, below are boring but stale stocks to consider.
Costco (COST)
Generally speaking, membership-only warehouse-style retailer Costco (NASDAQ:COST) offers a strong case for combating inflation. After all, one of the easiest, most practical means of dealing with rising prices is to buy in bulk. That way, you can get ahead of the curve as prices rise. Still, I also think COST makes a solid case for reliable stocks during rate hikes.
First, with Costco, you’re dealing with a wealthier consumer base. Now, I don’t want to get bogged down with comparisons. However, I wrote an article on TipRanks last year detailing the average shopper income between Costco members and guests of other competing big-box retailers. Bottom line, we’re talking about a sizable difference. And that translates to Costco members being more economically insulated.
Second, while COST trades at a pretty premium – a forward price-earnings ratio of nearly 37X will do it – it does benefit from a stout balance sheet. For example, Costco’s cash-to-debt ratio clocks in at 1.52X, better than 72.46% of companies in the retail defensive segment. Thus, it’s one of the stocks resistant to interest rate increases.
Sempra Energy (SRE)
One of my go-to ideas for reliable stocks during rate hikes, Sempra Energy (NYSE:SRE) at first glance doesn’t seem a worthy candidate. For example, the company doesn’t enjoy sterling financials. In particular, its balance sheet seems questionable. With a cash-to-debt ratio of 0.02x, that’s just low. I don’t care what industry we’re talking about, that will raise some eyebrows.
Nevertheless, plug your nose the best you can and you may appreciate the rationale for boring but stable stocks. Fundamentally, as a utility provider, Sempra benefits from a natural monopoly. Basically, would-be competitors don’t even try attacking this behemoth. And therefore – to the chagrin of many in San Diego where it’s headquartered – Sempra enjoys free reign.
You know what? People will pay up because they have no choice. And don’t worry about the political narrative centering on people eager to get out of California because of liberal policies. While Golden State residents are exiting, the departure stems largely from lower-to-middle-income workers. However, California does see an influx of higher-income workers, meaning Sempra should have a bigger addressable market.
Home Depot (HD)
One of the most boring enterprises among reliable stocks during rate hikes, Home Depot (NYSE:HD) effectively represents government infrastructure under certain circumstances. For example, when inclement weather conditions strike, if it’s safe, Home Depot will open its doors, providing necessary goods for patrons. We all saw what an essential business the home improvement retailer was during the worst of the Covid-19 crisis.
I don’t want to get my personal feelings involved. However, if I did love a publicly traded company, it might be Home Depot. Fundamentally, the brand offers permanent relevance, in my opinion. Whether we’re in a bull market, bear market, or whatever this [expletive] is, circumstances always go awry. Doors creak, pipes leak and that [expletive] smoke detector always goes off at 2 am.
Home Depot is where you solve most of these problems. I don’t think you’re going to get rich speculating on HD. However, it’s easily one of the stocks resistant to interest rate increases because of sheer necessity.
Procter & Gamble (PG)
When it comes to snooze-inducing reliable stocks during rate hikes, Procter & Gamble (NYSE:PG) offers a very sensible case. Thanks to its massive library of consumer goods brands and product categories, P&G also enjoys effective permanent relevance. No matter what’s going on with the market or the economy, people will take care of their personal hygiene. Well, at least I hope they do.
Another element that qualifies PG as one of the boring but stable stocks centers on consumer priorities. In the extreme, we saw this dynamic play out during the initial disruption of Covid-19. If you remember, what was the one product that everybody rushed to the grocery store for? Toilet paper.
Now, we’re not going to have a TP crisis anytime soon. However, the takeaway is that when consumers face pressure, they inherently prioritize the essentials. That’s the predictability factor that should serve PG well. As you might imagine, P&G doesn’t offer sexy stats. However, it’s consistently profitable with a trailing-year net margin of 17.69%. When the Fed gives you lemons, make lemonade with PG stock.
Dollar Tree (DLTR)
While the story I’m about to tell doesn’t directly relate to Dollar Tree (NASDAQ:DLTR) as one of the reliable stocks during rate hikes, it’s definitely crucial to recognize. According to data from S&P Global Mobility, the average age of passenger vehicles on U.S. roadways hit a record 12.5 years this year. As the reporting agency AP pointed out, this framework suggests that people are holding onto their vehicles for longer than ever.
Obviously, it’s clear that headwinds such as inflation and the responding spike in benchmark interest rates hurt consumers’ spending power. Otherwise, it would make sense for people to buy replacement vehicles. Few things in life are as problematic – and cash-draining – as nursing an aging, unreliable vehicle.
So, what does this have to do with Dollar Tree? Because consumers are hurting so badly, they need discounts wherever they can find them. Should layoffs materialize due to higher rates, DLTR could be (cynically) a big winner. Therefore, it’s one of the boring but stable stocks to consider.
Aflac (AFL)
Another example of reliable stocks during rate hikes that don’t seem particularly promising on the surface level, Aflac (NYSE:AFL) nevertheless deserves consideration. Sure, the company’s balance sheet leaves much room for improvement. For example, its cash-to-debt ratio sits at 0.51x, worse than 77.46% of its insurance industry peers. It’s also not the most operationally efficient entity given its modest Piotroski F-Score of 5 out of 9.
At the same time, insurance companies may be winners in a hawkish monetary policy environment. Basically, portfolio yields may rise alongside benchmark rates, which may translate to insurers’ investment earnings also increasing. To be fair, it’s not a guarantee that insurance providers will do well; it’s just an element that may work in their favor.
However, for Aflac specifically, its core business of providing supplemental insurance products may catch on. Not far removed at all from the Covid-19 crisis, everyone learned that anything can happen. Therefore, it’s better to protect yourself against the unknown, making AFL one of the stocks resistant to interest rate increases.
Grocery Outlet (GO)
In my view, Grocery Outlet (NASDAQ:GO) represents the riskiest idea for reliable stocks during rate hikes. For example, the company sports a cash-to-debt ratio of 0.06x, worse than 86.56% of competitors in the defensive retail sector. In addition, GO trades at trailing earnings multiple of nearly 50 and a forward multiple of 33.78. Both stats are incredibly overheated against the sector median values.
Nevertheless, I appreciate Grocery Outlet’s core business. As the brand name suggests, the company provides groceries at discounted prices. That’s going to catch fire (in a good way) as consumers feel the heat, either through inflation or the impact of deliberate disinflation (i.e. mass layoffs). So, in my view, GO is well positioned as one of the stocks resistant to interest rate increases.
Finally, while its demand profile doesn’t look appealing on a long-term basis, the narrative has perked up recently. In the first quarter of 2023, Grocery posted revenue of $965 million, up considerably from the $831 million posted in the year-ago quarter. As consumer priorities shift, GO can soak up the demand. Thus, it’s one of the boring but stable stocks to buy.
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.