Three Stocks Poised to Benefit from Inflation Cooling
The macro landscape has made a positive shift. The freshly released consumer price index (CPI) remained unchanged in October at a 3.2% annual inflation rate. More importantly, core CPI, excluding volatile food and energy costs, beat the 4.1% forecast at 4%.
Every month, core CPI also beat the 0.3% forecast at a 0.2% increase, marking the smallest inflation uptick since September 2021. The cost of used cars, gasoline, gas utilities, and fuel oil was the largest culprits for the inflationary slowdown, while transportation and shelter costs remained elevated at 9.2% and 6.7%, respectively.
The Federal Reserve is more inclined to maintain the 5.25% borrowing rate on the road to the 2% inflation target. In the meantime, both the stock and bond markets reacted positively. The Dow Jones Industrial Average went up 300 points while 10-year treasury yield dropped under 4.50% from 4.64%.
Which Stocks Benefit from Inflation Cooldown?
Lower treasury yields point to decreased expectations for future rate hikes. The question is, which type of stocks benefit from inflation cooldown? The tech sector is especially vulnerable to future rate hikes as it relies on cheap capital for growth, even if companies have strong free cash flow.
After all, investors hit the selloff button more often than not as they shift to risk-averse assets like bonds or consumer staples. To that end, decreased inflationary pressure has also placed consumer discretionary stocks on the investment table.
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Chipotle Mexican Grill (NYSE: CMG)
In the last two years, the popular fast-food chain increased menu prices four times. This October marks the first increase since August 2022 to offset inflation and rising wages. Yet, Chipotle has managed to keep double-digit growth figures.
In the latest Q3 2023 earnings roundup, Chipotle beat revenue estimates again, at 11.3% year-over-year growth to $2.5 billion. Against the $10.55 earnings per share (EPS) consensus (non-GAAP), the chain beat it at $11.36. This is 19% higher than a year ago.
Even more indicatively, the company opened 62 new restaurants while the tech sector has been experiencing layoffs. This was followed by 4% YoY transaction growth. Year-to-date, CMG stock is up 58%, with a 22% uptick during the last month.
Based on 30 analyst inputs pulled by Nasdaq, CMG shares are a “strong buy”. The average CMG price target is $2173.88 vs the current $2172.12. The high estimate is $2525 vs the low forecast of $1885 per share.
Adobe Inc. (NASDAQ: ADBE)
Many tech companies have dived into the AI hype, but few have delivered AI-powered products as actionable. Even before AI, Adobe has cornered the multimedia and creativity software market across its flagship products, Photoshop, Illustrator, After Effects, and InDesign.
Adobe’s core business model relies on stable, recurring subscriptions since the company transitioned to cloud computing in 2013. AI-powered Adobe Sense AI is now an integral part of the company’s software suite, automating repetitive tasks and short-circuiting the learning curve.
In Q3 2023, Adobe reported record high revenue of $4.89 billion, a 10.3% increase from a year-ago quarter. Likewise, the lean software giant beat quarterly consensus of $3.98 EPS by $0.11. Adobe’s profit margin keeps going up, and it is now at 28.69%.
Year-to-date, ADBE shares are up 80%. Based on 30 analyst inputs pulled by Nasdaq, ADBE stock is a “strong buy.” The average ADBE price target is $612.17 vs the current $603.50. The high estimate is $670 vs the low forecast of $441 per share.
Autozone (NYSE: AZO)
The Manheim Used Vehicle Value index showed a 2.3% monthly decrease in October, the first decline in three months. Likewise, the latest CPI report shows a 7.1% year-over-year decrease in used car prices, with a 0.8% monthly downturn. Both are beneficial for Autozone’s core business model.
The leading automotive specialty retailer centers its operations on the do-it-yourself (DIY) model, offering accessories, replacement, and maintenance parts across 6,400 US stores. In September, Autozone’s Q4 earnings reported $5.7 billion in net sales, a 6.4% increase from a year-ago quarter.
Out of that, Autozone increased gross profit, at 52.7% of sales, by 118 points compared to last year. In addition to increasing operating profit by 10.8% to $1.2 billion, Autozone beat the Zacks Consensus Estimate of $44.51 at $46.46 earnings per share (EPS). Of particular note for potential shareholders is Autozone’s generous stock buyback program, having repurchased 403,000 AZO shares in Q4 at an average price of $2,502.
Based on 21 analyst inputs pulled by Nasdaq, AZO stock is a “strong buy.” The average AZO price target is $2827.08 vs the current $2723.40. The high estimate is $3040 vs the low forecast of $2560 per share.
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