Inflation Is Going Wild. 15 Stocks to Help Tame It.

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Photovoltaic modules on an AES Tiete solar farm in São Paulo state, Brazil, in April.

Jonne Roriz/Bloomberg

Inflation has gotten bad enough to make it a concern for consumers, the Federal Reserve, and the investing public. Investors expect interest rates to rise as the Fed fights rising prices, which has led to a selloff in stocks to start the year.

But there is no need to sit, watch, and worry as stock prices fall. Investors can position their portfolios for inflation, though avoiding any effects isn’t likely to be easy. Inflation hasn’t been this high in more than a generation.

The consumer-price index, or CPI, rose 6.8% year over year in November, the most recent reading published by the Bureau of Labor Statistics. That is the highest level since the early 1980s. Data for December are scheduled to be released on Wednesday morning.

With inflation on the move, investors might want to look into the past to see what has worked in prior periods of soaring prices. Hartford Funds strategist Sean Markowicz recently found that five sectors tend to produce positive returns in inflationary times: utilities, real estate investment trusts, energy, consumer staples, and healthcare.

REITs and energy can beat inflation because of, well, inflation. Prices for real estate and oil can rise along with the cost of everything else. Utilities, staples, and healthcare, meanwhile, are relatively indispensable. Demand in those sectors doesn’t drop off even if prices for electricity or breakfast cereal have to rise to allow companies to maintain their profit margins.

Those five areas seem like a sensible place to start in building an inflation-protected portfolio, but picking the best stocks in those sectors is another challenge. That is where Wall Street can help.

Barron’s looked for the three most popular stocks in each of the five sectors, based on analyst ratings. The Russell 1000 index of large capitalization stock was our universe to pick from. The 15 stocks, in no particular order, are included below. Consider them a starting point for further research rather than a fully developed portfolio.

REITs:  Alexandria Real Estate Equities (ticker: ARE), Sun Communities (SUI), and Invitation Homes (INVH).

Energy:  Cheniere Energy (LNG), Marathon Petroleum (MPC), and ConocoPhilips (COP).

Utilities:  AES (AES), CenterPoint Energy (CNP), and NiSource (NI).

Consumer Staples:  Spectrum Brands (SPB), Mondelez International (MDLZ), and Philip Morris International (PM).

Healthcare:  Avantor (AVTR), Encompass Health (EHC), and Sotera Health (SHC).

Overall, about 90% of analysts covering the 15 companies rate the shares at Buy, while the average Buy-rating ratio for stocks in the Russell 1000 index is about 60%.

Inflation Protection

Analysts favorites in sectors that traditional offer protection from rising prices.

Name /Ticker Buy-Rating Ratio Upside 2022 PE Ratio Sector
Alexandria Real Estate / ARE 100% 12% 52.1 REIT
Sun Communities / SUI 100 17 56.1 REIT
Spectrum Brands / SBP 100 25 30.2 Staples
Avantor / AVTR 100 24 27.7 Healthcare
Encompass Health / EHC 100 32 15.2 Healthcare
Invitation Homes / INVH 100 46 24.9 Healthcare
Cheniere / LNG 96 19 124.1 Energy
AES / AES 92 31 15.1 Utilities
Marathon / MPC 89 10 40.1 Energy
ConocoPhillips / COP 87 14 13.6 Energy
Mondelez / MDLZ 86 7 23.2 Staples
NiSource / NI 83 5 20.5 Utilities
Invitation Homes / INVH 81 11 93.9 REIT
Philip Morris / PM 76 9 16.6 Staples
Centerpoint / CNP 76 6 19.4 Utilities

Bloomberg

The average potential gain based on analysts’ target prices for the 15 stocks is about 20%. That is in line with the average for the Russell 1000, but the potential gains within the index vary widely by industry.

The 15 stocks have been performing well, with an average gain of about 27% over the past year. The Russell 1000 index is up about 20%. The S&P 500 and Dow Jones Industrial Average are up 23% and 16%, respectively.

Twelve of the 15 stocks are up over the past year. Encompass Health, Sotera and AES have dropped.

Of course, there is no certainty that stocks that did well in the past will continue to do so. There’s no guarantee that sectors that comfortably rode out prior periods of high inflation will do well this time. Still, the 15 are a good start for anyone seeking shelter.