In this article, we discuss 10 best stocks to buy for deflation. If you want to see more stocks in this selection, click 5 Best Stocks to Buy for Deflation.
Deflation refers to the decline in price level of goods and services as inflation falls below 0%. The economy goes through a contraction of money supply and credit, and the purchasing power of consumers increases initially. Although laymen believe that falling prices and higher purchasing power sound good, deflation is actually harmful for the economy and the financial markets. The United States has only experienced two cases of extended deflation, one during the Great Depression of the 1930s and the other during the Great Recession from 2007 to 2009. While lower prices lead to greater purchasing power for consumers, deflation may result in consumers deferring purchases.
When consumers postpone purchases, the supply of goods remains high, and declining spending results in lower income for businesses. Businesses in turn layoff workers to control expenses, and this leads to greater unemployment, which can initiate a negative loop of even lower spending. This means dire economic consequences follow. During deflation, consumers focus on saving money rather than spending it. This is why they prefer holding cash reserves, and invest in dividend and defensive stocks such as healthcare, energy, tobacco and alcohol, gold, general household merchandise, and utilities. Some of the best stocks to buy for deflation include The Coca-Cola Company (NYSE:KO), AbbVie Inc. (NYSE:ABBV), and Exxon Mobil Corporation (NYSE:XOM).
Cathie Wood, the chief of ARK Investment Management, has been consistently warning the Wall Street about deflation. Her beliefs stemmed from aggressive tech and innovation slashing the prices of obsolete items and AI drastically trimming production costs.
Wood is more adamant about her deflation call as economic indicators point towards deflationary forces instead of inflationary. On September 10, Cathie Wood tweeted:
“Deflation in the pipeline, heading for the PPI, CPI, PCE Deflator: from post-COVID price peaks, lumber -60%, copper -35%, oil -35%, iron ore -60%, DRAM -46%, corn -17%, Baltic freight rates -79%, gold -17%, and silver -39%.”
After the Fed’s latest rate hike by three quarters of a percentage point, Wood turned to Twitter and wrote on September 22:
“Most disappointing about the Fed’s decision today was its unanimity. None of those voting on the Federal Reserve are focused on the significant price deflation in the pipeline. The Fed seems to be making decisions based on lagging indicators and analogies.”
Her recent calls for deflation have gotten quite a few prominent supporters, including Tesla, Inc. (NASDAQ:TSLA)’s Elon Musk and Jeffrey Gundlach, an American investor and the founder of DoubleLine Capital, an investment firm. Musk took to Twitter on September 10 and noted that a major rate hike risks deflation. Whereas, Gundlach said that the central bank has not paused to assess the impact of the earlier rate hikes. He observed “the deflation risk is much higher today than it’s been for the past two years”. He expects the economy to plummet into a deflationary period “certainly in 2023”.
Photo by buian_photos on Unsplash
Our Methodology
We selected defensive, cash-rich stocks that have a strong history of paying dividends. These businesses are most likely to survive deflation and continue dividend payments, which is attractive for shareholders as deflation ultimately leads to high unemployment. The demand for the businesses selected for this list will also remain robust despite an economic slowdown.
We have arranged the list according to the hedge fund sentiment around the securities, which was assessed from Insider Monkey’s Q2 2022 database of about 900 elite hedge funds.
Best Stocks to Buy for Deflation
10. British American Tobacco p.l.c. (NYSE:BTI)
Number of Hedge Fund Holders: 17
British American Tobacco p.l.c. (NYSE:BTI) is a London-based company that provides tobacco and nicotine products to consumers worldwide. It offers vapor, tobacco heating, modern and traditional oral nicotine products, and combustible products. British American Tobacco p.l.c. (NYSE:BTI) is one of the highest paying dividend stocks in the consumer defensive sector, yielding 7.66% as of September 23. The last quarterly dividend of $0.735 per share was paid on August 22.
British American Tobacco p.l.c. (NYSE:BTI) is one of the best stocks to buy for deflation, as falling consumer spending propels the economy into a depressed state, which results in mass unemployment as well. When stress levels accelerate amid worsening economic conditions, people often turn towards nicotine and alcohol, which boosts stocks like British American Tobacco p.l.c. (NYSE:BTI).
On August 30, Barclays analyst Gaurav Jain raised the price target on British American Tobacco p.l.c. (NYSE:BTI) to 4,500 GBp from 4,400 GBp and reiterated an Overweight rating on the shares.
According to Insider Monkey’s data, 17 hedge funds were long British American Tobacco p.l.c. (NYSE:BTI) at the end of Q2 2022, compared to 19 funds in the last quarter. Rajiv Jain’s GQG Partners is the largest position holder in the company, with more than 34 million shares worth roughly $1.5 billion.
In addition to The Coca-Cola Company (NYSE:KO), AbbVie Inc. (NYSE:ABBV), and Exxon Mobil Corporation (NYSE:XOM), smart investors are flocking to British American Tobacco p.l.c. (NYSE:BTI) as a safe haven amid deflation.
Here is what Distillate Capital has to say about British American Tobacco p.l.c. (NYSE:BTI) in its Q1 2022 investor letter:
“Distillate Capital’s International FSV Strategy is less expensive, more fundamentally stable, and less levered than the benchmark All Country World Ex U.S. (ACWI-EX US) Index.The largest new position is British American Tobacco (NYSE:BTI), which was not owned previously due to leverage, but now passes that threshold and offers an 11% free cash flow to market cap yield.”
9. Kinross Gold Corporation (NYSE:KGC)
Number of Hedge Fund Holders: 21
Kinross Gold Corporation (NYSE:KGC) is a Toronto-based company engaged in the acquisition, exploration, and development of gold properties in the United States, the Russian Federation, Brazil, Chile, Ghana, and Mauritania. On September 19, the company announced a new and improved share buyback program, where it will repurchase $300 million in common stock during the rest of 2022 and allocate 75% of the excess cash to buybacks in 2023-2024 if net leverage is under the present 12 months’ net leverage ratio of 1.7:1. As of September 21, Kinross Gold Corporation (NYSE:KGC)’s dividend yield stands at 3.68%.
On September 21, National Bank analyst Mike Parkin raised the price target on Kinross Gold Corporation (NYSE:KGC) to C$9 from C$8.25 and kept an Outperform rating on the shares.
Among the hedge funds tracked by Insider Monkey, Kinross Gold Corporation (NYSE:KGC) was part of 21 public stock portfolios at the end of June 2022, compared to 22 funds in the earlier quarter. Jim Simons’ Renaissance Technologies is the largest stakeholder of the company, with 28.5 million shares worth $102.16 million.
8. Unilever PLC (NYSE:UL)
Number of Hedge Fund Holders: 21
Unilever PLC (NYSE:UL) is a London-based FMCG company that offers multiple essential products via Beauty & Personal Care, Foods & Refreshment, and Home Care segments. Unilever PLC (NYSE:UL)’s defensive nature makes it one of the safest stocks to buy and hold for deflation. As dividend stocks are highly popular among investors during deflationary periods, Unilever PLC (NYSE:UL) is one of the best stocks to load up on, with a dividend yield of 4.28% as of September 23.
On July 26, investment advisory Deutsche Bank upgraded Unilever PLC (NYSE:UL) to Buy from Hold with an unchanged price target of 4,600 GBp, noting that “commodity headwinds are now turning to tailwinds for 2023”. The firm said that Unilever PLC (NYSE:UL) has the potential for margin increases in 2023, while “many companies in the market will be seeing margin declines”. Analyst Tom Sykes issued the ratings update.
According to Insider Monkey’s second quarter database, 21 hedge funds were bullish on Unilever PLC (NYSE:UL), with collective stakes worth $813.3 million, compared to 23 funds in the prior quarter worth $1.10 billion. Tom Russo’s Gardner Russo & Gardner is the biggest position holder in the company, with roughly 7 million shares valued at $319 million.
Here is what Mayar Capital specifically said about Unilever PLC (NYSE:UL) in its Q2 2022 investor letter:
“In 1895 the Lever brothers created a new brand of hand soap. Inspired by the growing demand for hygiene products, the Lifebuoy brand of soaps was launched to ‘make health infectious’. 128 years later the Lifebuoy brand continues as a leading soap brand – albeit without the coal tar-derived ingredients list. In fact, the market research firm Kantar ranked Lifebuoy as the global #3 most chosen FMCG brand in 2020, just below Coca-Cola (KO) and Colgate (CL) – an astonishing fact given the age of the brand. While the brand is largely absent from shelves here in the UK, it is a juggernaut in Asian markets, and is the #1 brand in India.
There are two observations about the Lifebuoy story which tell us a lot about Unilever PLC (NYSE:UL), which is currently our largest holding in the Fund.
The first is the enduring power of brands in the consumer goods market. According to Kantar’s list of most chosen brands, the top 20 global marques have an average age of 116 years, with over half being founded in the 19th century. Fashions come and go, but there is something special about low-cost consumable goods that advantages strong, time-worn brand names…” (Click here to view full text)
7. Target Corporation (NYSE:TGT)
Number of Hedge Fund Holders: 46
Target Corporation (NYSE:TGT) is one of the largest American general merchandise retailers. On September 22, Target Corporation (NYSE:TGT) declared a $1.08 per share quarterly dividend, in line with previous. The dividend is payable on December 10, to shareholders of the company as of November 16. The forward yield was 2.72%. Target Corporation (NYSE:TGT) is one of the best stocks to safely navigate a deflationary environment.
On September 14, KeyBanc analyst Bradley Thomas initiated coverage of Target Corporation (NYSE:TGT) with an Overweight rating and a $200 price target. The analyst said his rating is “underpinned by an outlook for defensive growth, market share gains, and margin recovery to normal levels”.
According to the second quarter database of Insider Monkey, Target Corporation (NYSE:TGT) was part of 46 hedge fund portfolios, compared to 50 funds in the earlier quarter. Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital is the leading shareholder in the company, with 2.6 million shares worth $369.4 million.
Here is what LRT Capital Management specifically said about Target Corporation (NYSE:TGT) in its Q2 2022 investor letter:
“The Target Corporation (NYSE:TGT) operates retail stores that sell a variety of merchandise ranging from necessities such as food and hygiene products to discretionary products like children’s toys and electronics. The sale of this merchandise is done primarily through physical retail locations in all 50 US states. However, Target also sells its merchandise digitally through its online website which delivers merchandise to its customers in three ways: order pickup, drive up, and “Shipt”. The Target Corporation operates a single segment through 1,926 physical stores.
Target is one of the largest US brick-and-mortar retailers and has successfully adapted to the competitive environment in the age of Amazon. As of 7/15/2022, TGT shares are down 36% for the year and down 44% since their all-time-high last year. The business is experiencing issues that are temporary in nature and we believe that the shares present an attractive opportunity at current prices. Target performed exceptionally well during the Covid-19 pandemic and its aftermath. Unfortunately, the company was recently caught flat footed, as consumer preferences shifted towards more spending on services (such as travel), at the expense of physical goods. As a result, the company found itself with an excess of inventory which will likely pressure margins in the next few quarters. Target is not alone in this predicament as many retailers such as Walmart and Best Buy have experienced similar issues over the last few months. The Covid-19 pandemic created enormous difficulties for retailers in forecasting demand and appropriate inventory levels. Clearing excess inventory will pressure margins in the short-term, and while this is a clear negative for the company, we do not believe it detracts from the long-term attractiveness of the business. Target shares are currently “on sale” due to increased uncertainty about near-term operating margins – this we believe is an opportunity.
Weak consumer sentiment, a slowing economy, recession fears, along with a list of other problems have called Target’s margins and short-term profitability into question. Until the most recent earnings calls, Target and many other retailers were seeing record margins and consumer demand. This led to oversupplying of inventory with a now weaker consumer and that is temporarily damaging the operating metrics of Target and similar retailers. Target’s margins are among the highest in the retail industry, and although it will take a hit in the coming quarters the company’s operating margin will likely return to roughly 7% in the longer term…” (Click here to read the full text)
6. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Holders: 59
NextEra Energy, Inc. (NYSE:NEE) is a Florida-based company that generates, transmits, and distributes electric power to retail and wholesale customers in North America. It also develops, constructs, and operates long-term clean energy solutions, such as renewable generation facilities, battery storage projects, and electric transmission facilities. NextEra Energy, Inc. (NYSE:NEE)’s latest quarterly per share dividend of $0.425 was distributed on September 15.
BMO Capital analyst James Thalacker on September 16 raised the price target on NextEra Energy, Inc. (NYSE:NEE) to $100 from $92 and maintained an Outperform rating on the shares. The analyst is positive on the firm’s market-leading profile within the group and believes that NextEra Energy, Inc. (NYSE:NEE) warrants a premium valuation given its fundamental and thematic drivers.
According to Insider Monkey’s data, 59 hedge funds were long NextEra Energy, Inc. (NYSE:NEE) at the end of June 2022, compared to 64 funds in the previous quarter. Ken Fisher’s Fisher Asset Management is the leading stakeholder of the company, with 16.2 million shares worth $1.25 billion.
Like The Coca-Cola Company (NYSE:KO), AbbVie Inc. (NYSE:ABBV), and Exxon Mobil Corporation (NYSE:XOM), NextEra Energy, Inc. (NYSE:NEE) is one of the best stocks to buy for deflation.
Here is what ClearBridge Investments specifically said about NextEra Energy, Inc. (NYSE:NEE) in its Q2 2022 letter.
“We increased our exposure to the energy transition during the quarter with new positions in Iberdrola (OTCPK:IBDSF), a Spanish-based integrated utility that is also one of the leading renewable energy developers in the world, and NextEra Energy, Inc. (NYSE:NEE), an integrated utility business with a regulated utility operating in Florida and the largest wind business in the U.S. The war has opened the eyes of the world that energy independence is critical. Renewables are for many countries the only way to get to the target. It is expected that existing renewable project pipelines will be executed faster, and more projects added to existing pipelines.
The energy transition would be extremely helpful for climate change and Iberdrola ranks well on our ESG matrix. NextEra, meanwhile, recently raised future earnings forecasts, citing a very favorable macro environment for rapid renewable generation expansion driven by decarbonization of the U.S. economy and the relative attractiveness of renewable generation in the context of high natural gas and power prices.”
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Disclosure: None. 10 Best Stocks to Buy for Deflation is originally published on Insider Monkey.