In this article, we discuss the 10 stocks to buy before stagflation begins. If you want to read about some more stocks to buy before stagflation, go directly to the 5 Stocks to Buy Before Stagflation Begins.
Concerns around the rise of inflation in the United States and the policies of the Federal Reserve to tackle the problem have given rise to predictions about stagflation at the stock market. The term, coined by British politician Iain Macleod nearly five decades ago, describes an economic dilemma wherein actions intended to lower inflation, like a raise interest rates, may exacerbate unemployment and slow down economic growth, leading to a recession. The oil shock of the 1970s and the resulting inflation and unemployment is one example of stagflation.
Over the years, rising prices amid periods of slow economic growth have become normal. This is why market experts have warned that the record-levels of inflation over the past few months and the beginning of a tighter monetary policy by the Fed will likely lead to a recession. In this scenario, stable companies with attractive cash flows, like Micron Technology (NASDAQ:MU), Pfizer Inc. (NYSE:PFE), and Exxon Mobil Corporation (NYSE:XOM), among others discussed in detail below, are attracting the attention of investors.
Our Methodology
The companies that are best positioned to gain as cash flows and balance sheets become central to investing strategies amid high inflation, slow economic growth, and elevated unemployment were selected for the list.
Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each firm.
Stocks to Buy Before Stagflation Begins
10. Hasbro, Inc. (NASDAQ:HAS)
Number of Hedge Fund Holders: 22
Hasbro, Inc. (NASDAQ:HAS) is a Rhode Island-based leisure entertainment firm. Elite hedge funds are bullish on the stock. At the end of the fourth quarter of 2021, 22 hedge funds in the database of Insider Monkey held stakes worth $224 million in Hasbro, Inc. (NASDAQ:HAS), compared to 25 in the previous quarter worth $185 million.
On February 8, DA Davidson analyst Linda Bolton kept a Buy rating on Hasbro, Inc. (NASDAQ:HAS) stock with a price target of $121, predicting that the growth of the firm would accelerate in the coming months with operating margins expected to top 16%.
Just like Micron Technology (NASDAQ:MU), Pfizer Inc. (NYSE:PFE), and Exxon Mobil Corporation (NYSE:XOM), Hasbro, Inc. (NASDAQ:HAS) is one of the stocks on the radar of elite investors amid rising inflation.
9. Best Buy Co., Inc. (NYSE:BBY)
Number of Hedge Fund Holders: 29
Best Buy Co., Inc. (NYSE:BBY) retails technology products. On March 4, Jefferies analyst Jonathan Matuszewski maintained a Buy rating on the stock and raised the price target to $140 from $137, appreciating the updated guidance numbers of the firm that target operating margins of around 6.8% by 2025.
Best Buy Co., Inc. (NYSE:BBY) is one of the most reliable retail stocks in the finance world. Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm AQR Capital Management is a leading shareholder in Best Buy Co., Inc. (NYSE:BBY) with 1.3 million shares worth more than $132 million.
8. Sunrun Inc. (NASDAQ:RUN)
Number of Hedge Fund Holders: 31
Sunrun Inc. (NASDAQ:RUN) markets residential solar energy systems. It is one of the favorite solar stocks on Wall Street. Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tiger Global Management LLC is a leading shareholder in Sunrun Inc. (NASDAQ:RUN) with 7 million shares worth more than $242 million.
On February 18, Morgan Stanley analyst Stephen Byrd kept an Overweight rating on Sunrun Inc. (NASDAQ:RUN) stock with a price target of $91, noting that the reversal of pandemic trends would drive higher margins for the company in 2022.
In its Q2 2021 investor letter, Horizon Kinetics, an asset management firm, highlighted a few stocks and Sunrun Inc. (NASDAQ:RUN) was one of them. Here is what the fund said:
“What this table did not cover is valuation. What’s expensive, what’s cheap? A good business that is too expensive is not a good investment. The most expensive business in the table is Sunrun Inc. (NASDAQ:RUN). Sunrun is the nation’s largest residential rooftop solar panel system seller/installer. Sunrun’s valuation might also shed Thumbnail valuation.
To start at the top of the income statement, Sunrun Inc. (NASDAQ:RUN) shares trade at 10.3x revenues. The most profitable company in the S&P 500, Microsoft, trades at 13x revenues. Sunrun operates at a loss. Obviously, not only is tremendous growth anticipated, but tremendous profitability, too.
Let’s simply accept that investors have correctly anticipated Sunrun’s future success and make that the starting point for a valuation exercise.
If, 10 years from now, Sunrun Inc. (NASDAQ:RUN) is ultimately valued at 25x net income, and if today’s $9.5 billion valuation is appropriate, that would require $380 million of net income ($9,500 million ÷ 25).
Let’s say Sunrun will have the same net profit margin as the average S&P 500 company, which is 10%. That means it would need $3,800 million of sales to generate that level of earnings ($380 mill ÷ 10%).
Since sales are now $920 million, they would have to rise by 4.1x in the next 10 years. That would require annual sales growth of 15.2%.
You see how neatly that all works: investors accept the company’s 10-year, 15% annual sales growth projections, and if a 10% net profit margin and a P/E of 25x earnings are reasonable, then the company will have a $9.5 billion market cap at that time. Except that is the current price. That means a 10-year return of zero.
In order to get a 10% annualized return from the stock, Sunrun would need to be priced at a P/E of 65x its earnings 10 years from now, if at a 10% net margin. Or it would have to have some combination of lower P/E and higher growth and/or higher profit margin.
In the meantime, this is Sunrun’s recent pattern of revenue growth and profitability (the company did recently increase its estimate of installed-capacity growth in 2021 from 20-25% to a new estimate of 25% to 30%).
For the time being, SSunrun Inc. (NASDAQ:RUN) loses an extraordinary amount of money, an amount that has been getting larger. Perhaps there are scale economies that will manifest in the future,so that it will attain profitability. Perhaps from the roughly one-half of Sunrun’s revenues that are from long-term customer service agreements that run up to 25 years. For now, though, the company would seem to require a lot of external financing, and that is one of the greatest of business risks.”
7. Medtronic plc (NYSE:MDT)
Number of Hedge Fund Holders: 55
Medtronic plc (NYSE:MDT) develops and markets device-based medical therapies. On March 1, Bank of America analyst Travis Steed reinstated coverage of the stock with a Buy rating and a price target of $135, noting that the present valuation pipeline of the firm was not being valued by the Street.
Major hedge funds hold large stakes in Medtronic plc (NYSE:MDT). At the end of the fourth quarter of 2021, 55 hedge funds in the database of Insider Monkey held stakes worth $2.7 billion in Medtronic plc (NYSE:MDT), compared to 62 in the previous quarter worth $2.2 billion.
In its Q1 2021 investor letter, Polen Capital, an asset management firm, highlighted a few stocks and Medtronic plc (NYSE:MDT) was one of them. Here is what the fund said:
“The top absolute detractors during the quarter (includes) Medtronic plc (NYSE:MDT). Shares of Medtronic plc (NYSE:MDT) underperformed during the quarter on what we see as short-term setbacks in its Renal Denervation technology and HUGO robotic surgery platform. Both are pipeline prospects that could be sources of revenue growth if Medtronic plc (NYSE:MDT) can successfully commercialize them. However, they are not generating meaningful sales today. Looking ahead, we believe Medtronic’s management is handling this world-leading tech business well and that its growth prospects remain compelling.”
6. Blackstone Inc. (NYSE:BX)
Number of Hedge Fund Holders: 62
Blackstone Inc. (NYSE:BX) is an alternative asset management firm. Hedge funds have been piling into the stock in recent months. At the end of the fourth quarter of 2021, 62 hedge funds in the database of Insider Monkey held stakes worth $3.1 billion in Blackstone Inc. (NYSE:BX), up from 54 in the preceding quarter worth $2.5 billion.
On January 13, Deutsche Bank analyst Brian Bedell maintained a Buy rating on Blackstone Inc. (NYSE:BX) stock with a price target of $176, noting that rising interest rates would benefit firms like Blackstone, with additional boosts in the earnings season.
In addition to Micron Technology (NASDAQ:MU), Pfizer Inc. (NYSE:PFE), and Exxon Mobil Corporation (NYSE:XOM), Blackstone Inc. (NYSE:BX) is one of the stocks that hedge funds are buying as economic growth slows.
In its Q4 2021 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Blackstone Inc. (NYSE:BX) was one of them. Here is what the fund said:
“Investment heavyweight Blackstone’s virtuous cycle is in full swing. Throughout Blackstone’s history, excellent investment performance and capital protection have allowed the firm to increase fundraising in existing verticals as well as launch new endeavors. Historically, less than 10% of assets under management mature in any given year, and that number should move lower with continued growth in perpetual capital vehicles. Blackstone’s A+ rated balance sheet and capital-light model are the backbone of its 85% of cash flow distribution policy via a variable quarterly dividend. In short, Blackstone Inc. (NYSE:BX) is a long-duration fee stream and robust capital-raising engine.”
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Disclosure. None. 10 Stocks to Buy Before Stagflation Begins is originally published on Insider Monkey.
