Without a doubt, inflation is decelerating in America, as the country’s Consumer Price Index actually declined 0.1% in December compared with November. If inflation continues to sink, several sectors whose performances are heavily influenced by consumers’ spending power and/or interest rate levels should outperform going forward. In this column, I will identify a number of those sectors and recommend seven stocks to buy within those spaces.
Of course, the demand for housing is heavily dependent on interest rate levels since higher rates result in significantly higher mortgage payments. And if inflation slows, the Fed will stop raising interest rates sooner rather than later. As a result, a significant deceleration of inflation would be positive for housing stocks and for a number of other companies whose performance is closely linked to the housing sector.
Similarly, higher interest rates raise the payments on auto loans, so automakers will benefit from lower rates. And finally, many types of consumer discretionary names would benefit from lower inflation because a decline in the inflation rate would significantly raise the discretionary income of consumers in general and of middle-class consumers in particular.
Let’s take a look at seven stocks to buy within those sectors.
If inflation rates drop, interest rates will stop going up, greatly increasing the number of homes that Americans buy. And that trend, in turn, will help Williams-Sonoma (NYSE:WSM), a retailer that specializes in selling high-level home furniture.
In a Jan. 17 interview on CNBC, WSM CEO Laura Alber said that many consumers are “still shopping” for home furniture, adding that “So many people started projects during the pandemic” that they are finishing now.
Additionally, Alber stated that many consumers realize that entertaining at home is cheaper than taking trips, and she noted that the retailer is benefiting from greatly improved supply chains and lower costs.
If inflation drops meaningfully, middle-class and upper-middle-class consumers should have much more money to spend on Williams-Sonoma’s products. (Wealthy consumers were, I believe, not meaningfully hurt by elevated inflation.)
WSM stock has a very low forward price-earnings ratio of just 8.8.
Lowe’s Companies (LOW)
Like Williams’-Sonoma, Lowe’s (NYSE:LOW) would benefit from a rejuvenated real estate market and an increase in middle-class and upper-middle-class consumers’ purchasing power, which is why it is among the best stocks to buy during decreasing inflation.
Also noteworthy is that LOW approved a rather large, new $15 billion share buyback program in December, while the company expects to generate healthy 2023 earnings per share of $13.65 to $13.80. Despite the housing slump, it expects its revenue to be roughly unchanged this year versus last year.
And in a note to investors last month, Goldman Sachs wrote that it had become more bullish on the LOW stock after the retailer stated that it believes that its “weak market [forecast] is the least likely outcome for 2023.” Goldman noted that the retailer expects its 2023 operating margin to beat analysts’ average estimate, and the bank kept a “buy” rating on the shares.
The LOW stock has a reasonable forward price-earnings ratio of 15 and pays a 2% dividend.
Macy’s (NYSE:M) is yet another retailer that should perform better as inflation eases. As I noted earlier, the spending of middle-class and upper-middle-class consumers should be boosted the most by easing inflation. That’s because the spending of poorer consumers will still be constrained by the inflation that occurred in the past, while wealthy people were never meaningfully hurt by inflation in the first place. Since Macy’s flagship stores cater to middle-class and upper-middle-class consumers, it should get a big lift in easing inflation.
Also noteworthy is that Macy’s reported significantly stronger than expected third-quarter results in November, as its Q3 EPS came in at 52 cents, well above analysts’ average outlook of 19 cents. The results showed that the retailer, which raised its full-year EPS guidance slightly, was resilient despite consumers’ goods-to-services switch and high inflation.
On the other hand, the company’s revenue did drop 4% year-over-year, and earlier this month, Macy’s announced that its fiscal Q4 sales would come in at the “low to medium” portion of its previous $8.16 billion to $8.4 billion guidance. However, it reiterated its $1.47 to $1.67 Q4 EPS outlook.
But a continued deceleration of inflation would definitely help Macy’s, and M stock is trading at a very attractive forward price-earnings ratio of just 5.5 times. Additionally, the shares have a sizeable dividend yield of 2.8%.
While I’m far from an expert on the homebuilding sector, PulteGroup (NYSE:PHM) sounds like it’s one company in the space that caters primarily to middle-class and upper-middle-class consumers. As I noted previously, I expect those consumers’ spending to get the biggest lift from a continued deceleration of inflation.
According to Benzinga, Pulte “offers products to entry-level, move-up, and active-adult buyers.”
PHM stock is already showing signs of recovering, as it’s up 12% so far in January and 37.5% in the last three months. Moreover, the stock’s price-earnings ratio is a very low 5.2 times.
On Jan. 11, Bank of America upgraded PHM stock to “buy” from “neutral.” The firm believes that homebuilder stocks already reflect a weak housing market, and it pointed out that mortgage rates are dropping. The firm expects rates to fall further in 2023 and predicts that homebuilders will benefit from lower raw-material prices this year.
And importantly, Investor’s Business Daily gives PHM a Composite Rating of 97 out of 100. The publication gives PHM an “A” when it comes to Accumulation/Distribution, which measures the extent to which institutional investors have been buying the stock in the last 13 weeks. Thus, it is among the best stocks to buy when inflation decreases.
As I noted in a recent column on Tesla (NASDAQ:TSLA), the automaker is among the top stocks to buy due to many strong, positive catalysts, including a very powerful brand, the affordability of its new, full-sized truck, and the subscriptions that it’s selling.
Additionally, upcoming lower interest rates, combined with its recent price cuts and the federal tax credits for which many of its EVs became eligible this year, should make it’s EVs affordable for many more middle-class and upper-middle-class Americans.
Indeed, that trend already appears to be getting underway, as Elektrek earlier this week reported that the automaker was benefiting from record demand in America.
Tesla’s higher sales volumes, combined with the other positive catalysts that I mentioned, will enable its overall profits to climb a great despite its price cuts that have sparked so much unjustified hand-wringing on the Street.
As a result of those overdone fears, the forward price-earnings ratio of TSLA stock is a reasonable 24.5.
Cedar Fair (FUN)
Cedar Fair (NYSE:FUN), which owns and operates amusement parks and water parks, should get a big lift from middle-class families’ increased spending power. Also likely to boost FUN stock are the large price increases that Disney (NYSE:DIS) has implemented at its parks in recent months.
With the prices for Disney’s parks getting beyond the reach of many American middle-class families, the demand for Cedar Fair’s park could surge in 2023. In addition, Cedar Fair has already reported that it expects to set records for sales and adjusted EBITDA.
For the third quarter, Cedar Fair reported record EBITDA, excluding certain items, and its revenue jumped 12% year-over-year.
On Jan. 9, Citi wrote that it expects theme parks “to be fairly resilient” during what it predicts will be “a shallow recession.” The firm increased its price target on FUN to $49 from $47 and kept a “buy” rating on the shares.
The forward price-earnings ratio of FUN stock is a reasonable 14, and it has a significant dividend yield of 2.85%. Thus it is among the top stocks to buy if inflation sinks.
United Airlines (UAL)
When inflation decelerates, oil prices tend to be held in check, and such a trend is positive for UAL and its peers. Additionally, declines in inflation will provide middle-class and upper-middle-class consumers with more money to spend on trips, giving UAL another upbeat catalyst.
Moreover, United is continuing to benefit from the travel rebound generally, as it reported significantly stronger-than-expected fourth-quarter results, including a 51% year-over-year revenue increase, on Jan. 17. And impressively, the company’s Q4 operating margin rose over two percentage points versus Q4 of 2019.
Also likely to boost UAL for the next several months is the recent debacle that one of its key competitors, Southwestern (NYSE:LUV), suffered.
The forward price-earnings ratio of UAL stock is a low 8.8.
On the date of publication, Larry Ramer did not hold (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.
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