Stock Analysis & Ideas

3 Stocks to Watch if Stagflation Hits

Story Highlights

Stagflation could hit the market soon, causing a halt to medium-term market growth. However, tactical asset allocation could prevent investors’ portfolios from suffering losses.

Whether a recession or a stagflation will occur in the near future is a topic on its own. However, if you believe a stagflation is on the cards, here are three stocks, which I’m bullish on, for you to consider: Sibanye Stillwater (SBSW), Microsoft Corporation (MSFT), and Coinbase Global, Inc. (COIN).

A recessionary environment is formally classified as successive quarters of negative economic growth, which could lead to a prolonged broad-based stock market downturn. In contrast, stagflation is defined by slow economic growth coupled with high inflation. Therefore, the stock market will likely remain flat if stagflation occurs, in turn demanding cherry-picking of unique stock market segments.

Sibanye Stillwater (SBSW)

Investing in precious metal stocks during a stagflationary period could be a profitable strategy as investors tend to seek real yield in non-ferrous metals whenever the short-term growth embedded in the economy recedes.

Sibanye provides a lucrative precious metals option as it’s an oversold stock. The stock’s market value has eroded by more than 27% since the turn of the year amid a series of operational disruptions ranging from union strikes in South Africa to mine floods in Montana, USA. However, matters seem to be looking up for Sibanye as it’s settled much of its operating glitches, providing the firm with a clear road ahead.

The company is extremely profitable due to its solid market position in the platinum group metals space. Sibanye’s exposure to gold via its flagship gold mines, Beatrix and Kloof, also provides it with a well-diversified portfolio of assets.

Furthermore, relative valuation metrics suggest that Sibanye stock provides value in abundance. For instance, TipRanks’ price-earnings (PE) ratio tracker implies that Sibanye’s current PE ratio of 2.9x is six times lower than the stock’s two-year peak.

Turning to Wall Street, Sibanye Stillwater earns a Strong Buy consensus rating based on four Buys and one Hold. SBSW’s average price forecast of $17.98 implies 93.75% upside potential.

Microsoft (MSFT)

Another way to approach stagflation as an investor is to seek stocks that exhibit secular growth. Although Microsoft is considered a mature technology stock, its exposure to the cloud has reignited its exponential growth trajectory. Microsoft’s Azure holds down approximately 20% of the cloud infrastructure industry, which is an environment growing at a CAGR (compound annual growth rate) of 11.5%.

Furthermore, roughly 31% of Microsoft’s revenue stems from its productivity and business processes segment, an industry compounding at an annual growth rate of 12.6%. Thus, it’s evident that Microsoft isn’t due for a slowdown in core business activities anytime soon.

Microsoft’s hypergrowth is reflected in its style metrics. For example, the stock’s return on equity (ROE) of 48.72% implies that Microsoft’s bottom line is surging relative to its available equity. In addition, Microsoft’s recent improvement in its debt to assets ratio suggests that its investors’ residual value is increasing due to the company’s debt retirement.

By having a look at Microsoft stock’s valuation, it’s clear that the market underscores the stock’s price-earnings ratio (26.54x) as the metrics read at a 22.91% discount to its five-year average, while the firm’s net income is growing at peak levels.

Turning to Wall Street, Microsoft earns a Strong Buy consensus rating based on 28 Buys and one Hold. MSFT stock’s average price forecast of $345.53 implies 34.29% upside potential.

Coinbase (COIN)

Coinbase has suffered a rough ride lately. However, there’s hope down the end of the tunnel as many investors tend to seek alternatives to fiat currency in stagflationary environments, which could give rise to the cryptocurrency market.

Another reason investors should consider Coinbase is because the firm’s committed to improving its operational efficiency in the coming years to consolidate itself as a key player in the crypto trading domain.

According to the company’s CEO, Adam Armstrong, “We’ve been digging in to identify the set of changes we need to make to help us succeed at this new scale.”

“We need to empower our leaders to make decisions, and our teams to deliver great products to customers. It won’t be easy, and we’ll need to keep adjusting,” Armstrong added.

As things stand, Coinbase is tremendously overvalued as its price-earnings ratio (6x), along with its PEG ratio (0.08x), suggests that the market underprices the company’s earnings. Additionally, Coinbases’ price-cash flow is at a 72.15% sector discount, meaning that market participants haven’t fully recognized the company’s cash-based returns.

Turning to Wall Street, Coinbase earns a Moderate Buy consensus rating based on 13 Buys, six Holds, and two Sells. COIN stock’s average price forecast of $118.95 implies 58.03% upside potential.

Concluding Thoughts

Stagflation could come to haunt the stock market. However, investors could beat most of the headwinds by securing positions in tactical plays. The stocks mentioned in the article by no means guarantee a bulletproof portfolio. However, they’re considered “best in class” stagflation investments.

Read full Disclaimer & Disclosure

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