3 Stocks to Buy to Hedge Your Portfolio Against It
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In March, the Consumer Price Index — which measures the average prices consumers pay for many everyday items — rose to 3.3% from 2.4% in February. This is largely due to soaring gas prices, which have affected other corners of the economy. Rising prices may also impact equity markets (in fact, they already have), which is why it’s important for investors to purchase stocks that can perform well even in an inflationary environment. Here are three great examples: Walmart(NASDAQ: WMT), Visa(NYSE: V), and Netflix(NASDAQ: NFLX).
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People are always looking for a good deal, but especially so when prices rise. That’s where Walmart comes in. The company is one of the largest retailers in the world, and one of its core appeals is that it tends to offer lower prices than most of its competitors. Will Walmart be forced to hike the prices of some items due to inflation? Probably, but this is something other major merchants will also have to deal with. On net balance, Walmart should keep its Everyday Low Price guarantee intact relative to its peers, which could help it maintain consistent store traffic and decent revenue and earnings growth. Walmart has done exactly that for a long time, and there are many more years of excellent returns ahead.
One reason the company has excellent prospects is its push into digital commerce. Walmart is one of the largest e-commerce players in the U.S. As retail transactions increasingly move online, the company should see a boost in revenue and a decrease in operating costs. It will also power Walmart’s high-margin advertising business. Here’s one more aspect of the business that makes it attractive: Walmart is an excellent dividend stock. The company has increased its payouts for 53 consecutive years, which makes it a Dividend King, or a corporation with 50 or more consecutive annual dividend hikes. Risk-averse income investors looking for a safe haven in these volatile times — and for stocks that can perform well over the long run — should seriously consider Walmart.
Visa’s business can actually benefit from inflation. The company makes money by charging fees as a percentage of each credit or debit card transaction it helps process through its network. Higher prices mean higher fees per transaction and higher overall revenue, all else equal. It’s true that consumers will modify their behavior, and lower transaction volume will somewhat offset the gains from inflation. But Visa has typically performed well during inflationary periods.
That makes it a stock worth serious consideration today, especially given the massive addressable market in its niche and its wide moat. Visa has estimated that there are still trillions of dollars in transaction volume that can be brought into its ecosystem.
Further, the growth of the e-commerce market, which requires digital payment methods, will also be a major tailwind. Meanwhile, Visa has very few direct competitors thanks to its deep network effect that locks merchants and customers into its ecosystem. Finally, Visa is an attractive dividend stock as well. The financial services specialist has increased its payouts by an impressive 378.6% over the past 10 years.
Netflix recently announced yet another price hike. While many will complain, Netflix’s paid subscribers and revenue have moved in the right direction in recent years even through price increases. Netflix has established itself as a leading entertainment and media company and benefits from immense pricing power. That’s why inflation shouldn’t be too much of a problem for the company. Few people will cancel their Netflix subscriptions due to rising prices. But can the stock still beat the market, given the significant competition it now faces in streaming? Yes, it can. Here are three reasons why.
First, even though the competitive landscape has changed, Netflix remains the leader in streaming. The company’s deep ecosystem is a major competitive advantage, enabling it to study consumer preferences and craft its content strategy accordingly. Second, there is plenty of room to grow in the market. In the U.S., streaming still accounts for less than 50% of television viewing time (as of February).
Lastly, Netflix has been actively expanding its reach, notably in live sports. These initiatives could pay off down the road and help the stock deliver superior returns, once again.
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Prosper Junior Bakiny has positions in Visa and Walmart. The Motley Fool has positions in and recommends Netflix, Visa, and Walmart. The Motley Fool has a disclosure policy.
