These 3 Stocks Could Hedge against Future Rate Hikes
Stock Analysis & Ideas

These 3 Stocks Could Hedge against Future Rate Hikes

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Although the Federal Reserve remains committed to attacking historically high inflation, its hawkish measures could hurt broader business sentiment. Therefore, investors should focus on stocks that benefit from inelastic demand.

Given the historically high rate of inflation, the Federal Reserve’s announcement of another 75-basis point hike in the benchmark interest rate wasn’t particularly surprising. Given that this move represented the fourth consecutive spike of 0.75%, the central bank appears committed to tackling inflation. However, too much aggression may yield broader economic challenges. Thus, investors should focus on stocks that align with inelastic demand, particularly the tickers ALL, SRE and KR.

Generally speaking, inelastic demand refers to demand inflows for products or services that stay relatively unchanged, irrespective of pricing fluctuations. Of course, very few if any sectors enjoy pure inelastic demand as economic forces usually influence consumer behaviors. However, certain industries clearly benefit from inelasticity at the baseline of consumption; that is, certain products or services require a minimum level of use and purchase.

Fundamentally, one of the most inelastic sectors is the food-and-beverage industry. Obviously, humans require a minimum consumption of calories and water to live. Therefore, irrespective of economic pressures, households will do whatever it takes to put food on the table. Moreover, some elements of competition are non-existent because providers of sustenance do not suffer from a sector-wide trade-down effect.

In other words, people will certainly trade down to the cheapest providers of nutrition as economic conditions worsen. However, no alternatives for food exist. That’s why grocers may represent some of the most valuable stocks during ambiguous economic cycles. Without sector substitutes, the best-run grocers enjoy a captive audience.

Below are three stocks to buy with the Fed committing to a hawkish monetary policy.

Allstate (ALL)

Fundamentally, one of the easiest choices amid a rising interest rate environment is to focus on the insurance industry. Specifically, Allstate (NYSE:ALL) provides excellent exposure thanks to its myriad business units. For one thing, publicly traded insurance firms tend to have a direct relationship with interest rates: the higher the rate, the higher the insurance security may rise.

To be clear, the relationship isn’t guaranteed to generate upside all the time. However, it’s worth pointing out that ALL is up a little over 12% on a year-to-date basis. In sharp contrast, the benchmark S&P 500 index lost over 16% of value during the same period.

Additionally, people need insurance, even with economic pressures hurting their wallets. After all, getting into a car accident or suffering plumbing damage to one’s home may yield devastating financial consequences. Thus, the monthly premium may be worth paying.

Specific to Allstate, the company enjoys a wide range of quantitative attributes. For instance, its three-year revenue growth rate (on a per-share basis) stands at 15.8%, higher than 75.5% of its peers. Also, its book growth rate during the same period is 12.3%, better than 70% of the industry. Finally, its price-to-sales ratio is 0.68 times, favorably lower than the industry median of 0.98.

Is Allstate a Good Stock to Buy?

Turning to Wall Street, Allstate stock has a Moderate Buy consensus rating based on six Buys, five Holds, and one Sell rating. The average ALL price target is $141.08, implying 6.79% upside potential.

Sempra Energy (SRE)

Cynically, the case for utility firm Sempra Energy (NYSE:SRE) ranking among stocks to buy is simple: bad things happen when people flip on the switch and nothing materializes. Broadly speaking, crime tends to escalate if power outages remain unresolved for lengthy periods. So, from a social stability standpoint, utility firms represent critical infrastructure.

Beyond that, modern societies fully embrace digitalization and all its conveniences. Unfortunately, such conveniences practically evaporate without access to reliable power. Given the importance of access to critical services, households will sacrifice almost everything else before cutting into their utility bills. For Sempra specifically, the company enjoys dominance in Southern California, a regional economic powerhouse.

Like Allstate, Sempra also brings valuable quantitative metrics to the table. For instance, the company features a three-year book growth rate of 13.4%, beating out more than 83% of the competition. On the bottom line, Sempra enjoys an operating margin of 21.3%, which stands 72% above other stocks in the utilities space.

Is SRE Stock a Buy?

Turning to Wall Street, SRE stock has a Moderate Buy consensus rating based on six Buys, three Holds, and zero Sell ratings. The average SRE price target is $167.89, implying 8.56% upside potential.

Kroger (KR)

Easily ranking among the stocks to buy with urgency undergirding its inelastic demand profile, Kroger (NYSE:KR) deserves significant attention. As interest rates rise, investors should reasonably expect several business sectors to slow down, such as real estate. In turn, layoffs will likely accelerate so long as the Fed keeps tightening the money supply.

Yet despite this obvious pain point, people need to eat. Therefore, Kroger and its ilk represent cynical stocks to buy. Should economic conditions worsen, consumers will give up eating at pricey restaurants for more fast-casual, and then fast-food fare. Failing that, households will start cooking for themselves to save money, which boosts Kroger. After all, there’s not much competition below KR aside from dollar discount stores and fasting.

Not surprisingly, Kroger moved against the grain. While the S&P 500 is swimming in red ink, KR gained over 4% YTD. No, it’s not a huge victory. However, it’s far better than suffering a double-digit loss.

Quantitatively, Kroger features decent strength in the balance sheet, combined with a solid growth rate and acceptable profitability metrics. Perhaps most notably, its forward price-to-earnings ratio is 11.3 times, lower than the industry median’s 15.8 times.

Is KR Stock a Buy or Sell?

Turning to Wall Street, KR stock has a Hold consensus rating based on three Buys, eight Holds, and two Sell ratings. The average KR price target is $51.25, implying 8.81% upside potential.

Even Higher Rates Can’t Diminish All Stocks

To be fair, rising interest rates hurt many, if not most, stocks. Lower rates promote business expansion due to cheap money influxes. However, the opposite dynamic promotes “expensive” money, thus reducing the benefits of expansionary risk-taking. Still, certain industries benefit from the rise in the dollar’s purchasing power, meaning that investors aren’t completely out of options.


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