Stock Analysis & Ideas

COST, MPW, ENB: Hedge Your Bets with These Stocks

Story Highlights

A high inflationary environment and rising interest rates pose challenges for equity investors. However, COST, MPW, and ENB stocks could act as solid hedges in all market cycles.

Amid a high inflationary environment and the U.S. Fed’s hawkish stance to contain it, Costco (NASDAQ:COST), Medical Properties Trust (NYSE:MPW), and Enbridge (NYSE:ENB) (TSE:ENB) could provide some respite to investors’ worries in protecting their investment portfolios.

August’s Inflation Data Irk Investors

U.S. stocks marked a significant decline on Tuesday after August inflation numbers irked investors. The S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) Index fell 4.3% and 3.9%, respectively, in response to the CPI numbers. 

As opposed to its peak in June (when inflation jumped 9.1%), inflation in the U.S. continued to ease for the second straight month. It rose 8.3% in August against 8.5% in July. Despite the slight moderation, inflation remains relatively higher. Further, the core CPI (that excludes food and energy) increased 6.3% in August versus 5.9% in July. This implies that the U.S. Fed could continue to maintain a hawkish stance and increase interest rates further. 

High inflation and rising interest rates are not an amicable situation for enterprises and consumers. Further, they have the potential to hurt the demand and profitability of companies and ultimately impact their valuations. 

Against this backdrop, let’s see how investors could protect their portfolios with COST, MPW, and ENB stocks.

Costco (COST)

Costco’s solid sales growth in 2022, stable margins, and earnings growth show that this warehouse retailer has managed inflation better than its peers by passing on the burden of higher costs to consumers. 

Its adjusted comparable sales (a key performance metric) rose 10.8% in the third quarter of Fiscal 2022. Further, the momentum in its business continued, with comparable sales registering 8.7% growth in August. 

Although the company is not considering increasing its membership fee, the move could further support its top-line and earnings growth amid high inflation. Costco’s value proposition, ability to navigate challenges and robust growth make it a solid investment to hedge against inflation.

What Is the Prediction for Costco Stock?

COST’s average price prediction of $564.93 implies 10.7% upside potential. Costco stock scores a ‘Perfect 10’ on TipRanks, implying that it could easily outperform the market.

Meanwhile, analysts tracked by TipRanks are bullish about the prospects of COST stock, which commands a Strong Buy consensus rating based on 13 Buys and three Holds. 

Medical Properties Trust (MPW)

Focused on hospital facilities, Medical Properties Trust operates as a Real Estate Investment Trust (REIT). It owns 435 facilities and about 44,000 licensed beds across 10 countries. Given its focus on essential hospital real estate, MPW could prove to be a defensive bet (with hospitals generating nearly 90% of its total revenues) against an adverse macro environment. 

Further, the company’s lease agreements that have built-in inflationary rental escalators support its revenues whenever inflation increases. During its Q2 conference call, MPW said that it expects to receive more cash in rents in 2023 compared to the same-store portfolio in 2022 (due to the rent escalators).

Overall, MPW’s well-diversified portfolio, long lease expiration, and rent escalators that protect the company against inflation make it an attractive stock to buy. Furthermore, it offers a lucrative dividend yield of 7.7% (high enough to counter inflation).  

Is MPW Stock a Buy or Sell?

The uncertain macro environment is keeping analysts cautious but optimistic about the prospects of MPW stock. It has received eight Buy and five Hold recommendations for a Moderate Buy consensus rating.

MPW’s average price target of $18.54 implies 29.7% upside potential. Overall, MPW has a Neutral Smart Score of seven out of 10, which mirrors that the stock could perform in line with market expectations. 

Enbridge (ENB)

Energy infrastructure company Enbridge generates resilient cash flows amid all market cycles. It benefits from long-term contractual arrangements with commercial protections against rising inflation. 

It’s worth mentioning that 80% of Enbridge’s EBITDA has inflation protection, along with the cost of service recovery mechanism. Another key highlight is that most of Enbridge’s debt is of fixed rate, thus protecting it against higher interest rates.

Overall, strong demand, high system utilization rate, solid secured capital program, and inflation-protected EBITDA are expected to support its growth and dividend payouts. 

Enbridge has a solid track record of growing its dividends. Further, it offers an attractive dividend yield of 6.4%

Is ENB a Buy or Sell?  

The Street is cautious but optimistic about ENB stock. It has received five Buys and two Holds for a Moderate Buy consensus rating. ENB’s average price forecast of $46.55 implies 10.9% upside potential. Overall, ENB has an Outperform Smart Score of nine out of 10 on TipRanks. 

Bottom Line

High inflation and the Fed’s aggressive stance do not create ideal conditions for investors to bet on equities. However, the companies mentioned above have resilient cash flows, with arrangements that protect their margins and payouts even in a high inflationary environment, making them a solid investment to hedge against inflation. 

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