The swift economic rebound from the Covid shock unleashed the biggest inflationary wave we have witnessed since the early 1980s, according to The New York Times. Central banks started hiking interest rates in the summer of 2021 in response. Lead nation was Brazil. Early in 2022, the Federal Reserve stepped in, starting a bandwagon effect: As soon as the Fed acts and the dollar gains, other nations either hike their interest rates or risk a sudden devaluation, which fuels inflation even more. The world hasn’t witnessed monetary policy tightening on such a massive scale in recent decades as it is doing right now. The interest rate increases currently involve many more central banks, even though they are not as significant as those Paul Volcker, the Fed chief after 1979, pushed through.
Additionally, Covid-era stimulus programs are being phased out in favor of policies like the Inflation Reduction Act, which aims to reduce deficits and reduce demand in the economy, adding to the disinflationary push. According to a Brookings Institution analysis, the so-called “fiscal drag” in the US will cause the economy to contract by more than 3.4 percent of GDP in the third quarter.
Right now, deflation isn’t on anybody’s radar as everyone is concerned about inflation. However, we already know that technological improvements in several areas are deflationary and a major breakthrough in artificial intelligence and robotics over the coming years may cause a huge decline in human labor demand. In the near-term central bank over-tightening is the real risk factor in terms of deflation. Central bank policies take effect with a delay and they may increase the interest rates longer than necessary and don’t act in time to reduce them.
In any case you will notice that several of the best stocks for deflation are also very good investments during inflationary and recessionary times.
Our Methodology
We selected defensive, cash-rich stocks with a strong history of paying dividends. These businesses are most likely to survive deflation and continue dividend payments, which is attractive for shareholders as deflation ultimately leads to high unemployment. The demand for the businesses selected for this list will remain robust despite an economic slowdown.
We have arranged the list according to the hedge fund sentiment around the securities, which was assessed from Insider Monkey’s Q3 2022 database of about 920 elite hedge funds.
Best Stocks to Buy for Deflation
11. Royal Bank of Canada (NYSE:RY)
Number of Hedge Fund Holders as of Q3, 2022: 14
Royal Bank of Canada (NYSE:RY), a diversified financial service company, is one of the best Canadian stocks to buy and hold to fight deflation. Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury, and Capital Markets are the company’s five operating segments. Analysts are bullish on the firm’s long-term prospects, with investment advisories like Desjardins, Canaccord, and Keefe Bruyette raising their price targets on the stock this December.
In the fourth quarter, Royal Bank of Canada’s earnings increased further as diluted EPS rose 2% year over year to C$2.74. ROE for the period was down 130 basis points year over year to 15.6%, and the bank’s CET1 ratio fell 110 basis points year over year to 12.6%.
On November 30, Royal Bank of Canada declared a 3.1% hike in its quarterly dividend to C$1.32 per share. The stock’s dividend yield on December 27 came in at 4.06%. Royal Bank of Canada was in 14 hedge fund portfolios at the end of the third quarter of 2022, compared to 12 in the previous quarter.
On December 12, BofA analyst Ebrahim Poonawala upgraded Royal Bank of Canada to Neutral from Underperform with a price target of $104, down from $107. Despite a cautious view on the macro-economic outlook that is likely to challenge EPS growth and ROE defensibility for the Canadian banks sector, Poonawala notes Royal Bank shares have outperformed year-to-date and the analyst believes this relative outperformance could continue as investors seek exposure to the bank’s EPS and ROE “defensibility and dependable execution.”
10. Atmos Energy Corporation (NYSE:ATO)
Number of Hedge Fund Holders as of Q3, 2022: 23
Atmos Energy Corporation (NYSE:ATO) is a Texas-based natural gas distribution company that serves over 3 million customers. The company announced an 8.8% hike in its quarterly dividend on November 9 to $0.74 per share. This marked the company’s 38th consecutive year of dividend growth. Moreover, it has paid dividends to shareholders consistently for the past 156 quarters, which makes it one of the best stocks to buy for deflation.
On December 14, Wells Fargo analyst Sarah Akers raised her price target on Atmos Energy Corporation to $132 from $123 while keeping an Overweight rating on the shares. Her outlook for the sector is not as bullish heading into 2023, nor is she outright bearish. Atmos Energy Corporation saw a positive hedge fund sentiment in Q3 2022, as 23 hedge funds in Insider Monkey’s database owned stakes in the company, growing from 21 in the previous quarter. The stakes owned by these hedge funds are collectively worth over $293.03 million.
Aristotle Capital Management mentioned Atmos Energy Corporation in its Q1 2022 investor letter. Here is what the firm has to say:
“Headquartered in Dallas, Atmos Energy is the largest fully regulated natural gas-only utility in the U.S. It serves over three million distribution customers across eight states, primarily in the South. Approximately 70% of its revenue comes from Texas, where it owns one of the largest natural gas pipeline systems in the state. (Click here to view the full text)
09. SYSCO Corporation (NYSE:SYY)
Number of Hedge Fund Holders as of Q3, 2022: 40
Sysco Corporation (NYSE:SYY) is a Texas-based company that engages in the marketing and distribution of various food products to the food service or food-away-from-home industries in the United States, Canada, the United Kingdom, France, and internationally. Sysco Corporation operates through the U.S. Foodservice Operations, International Foodservice Operations, SYGMA, and Other segments.
On November 17, Sysco Corporation declared a quarterly dividend of $0.49 per share, in line with the previous. The dividend is payable on January 27, 2023 to shareholders of record on January 6. Sysco Corporation’s dividend yield on December 21 came in at 2.52%. The company has a history of consecutively increasing annual dividends for the last 53 years, making it a reliable dividend king and one of the best stocks to buy for deflation.
In November, Argus analyst John Staszak raised his price target on SYSCO Corporation to $96 from $92 and kept a Buy rating on the shares. Despite the Q1 earnings miss, the analyst is positive about the company’s efforts to offset lower food sales to restaurants and hotels by cutting costs and focusing on sales to grocery stores.
According to Insider Monkey’s data, 40 hedge funds were bullish on Sysco Corporation at the end of Q3 2022, compared to 32 funds in the prior quarter. Nelson Peltz’s Trian Partners held the biggest stake in the company, comprising 7.17 million shares worth about $507.52 million.
08. Automatic Data Processing (NASDAQ:ADP)
Number of Hedge Fund Holders as of Q3, 2022: 48
Automatic Data Processing (NASDAQ:ADP) reported strong Q1 results with adjusted EPS of $1.86 on sales of $4.22 billion versus the consensus of $1.79 on revenue of $4.16 billion. For FY23, the company sees adjusted EPS growth of 15% to 17% and revenue growth of 8% to 9%. The stock has a dividend yield of 2.08% as of December 27.
Shares of Automatic Data Processing have increased from around $50 per share in 2012 to $244.39 per share in 2022, thanks to strong growth. While Automatic Data Processing earned $2.82 per share in 2012, the company earned $7.00 per share in the fiscal year 2022. For the future, analysts estimate Automatic Data Processing will earn $8.11 per share in 2023, $8.99 per share in 2024, and $10.01 per share in 2025, which makes it a strong contender to be included in our list of best stocks to buy for deflation.
On December 12, Mizuho analyst Dan Dolev raised his price target on Automatic Data Processing to $285 from $276 and kept a Buy rating on the shares as part of the firm’s FinTech & Payments team providing its 2023 outlook for sub-sectors in the group against a backdrop of higher rates, high inflation, and a slowing macro.
At the end of Q3 2022, 48 hedge funds tracked by Insider Monkey owned stakes in Automatic Data Processing, Inc., compared with 39 in the previous quarter. These stakes hold a collective value of nearly $3.7 billion. Fundsmith LLP was the company’s major stakeholder in Q3.
Carillon Tower made the following comment about Automatic Data Processing, Inc. in its Q3 2022 investor letter:
“Despite a difficult macroeconomic environment, hiring trends have remained robust and Automatic Data Processing, Inc. (NASDAQ:ADP) shares reacted positively to strong quarterly earnings and guidance that was well above consensus expectations.”
07. 3M Company (NYSE:MMM)
Number of Hedge Fund Holders as of Q3, 2022: 49
3M Company (NYSE:MMM) is an American multinational conglomerate that operates in the industry, healthcare, and consumer goods arena. On December 9, Citi analyst Andrew Kaplowitz raised his price target on 3M Company to $126 from $117 and kept a Neutral rating on the shares. According to the analyst, the supply chain situation will improve the industry’s profitability heading into next year.
In the third quarter of 2022, 3M Company reported an operating cash flow of $1.5 billion, and its free cash flow for the quarter came in at $1.4 billion. Its cash generation was stable as it returned $1 billion to shareholders in dividends and share repurchases during the quarter. The company’s consistent dividend growth and strong cash position make it one of the best deflation stocks on our list.
3M Company currently offers a per-share dividend of $1.64 every quarter. The company holds a 64-year track record of consistent dividend growth, which makes it one of the best dividend stocks on our list. As of December 20, the stock has a dividend yield of 4.88%.
At the end of Q3 2022, 49 hedge funds tracked by Insider Monkey reported owning stakes in 3M Company, down from 54 in the previous quarter. The consolidated value of these stakes is over $1.45 billion.
Mayar Capital mentioned 3M Company in its Q2 2022 investor letter. Here is what the firm has to say:
“We also bought back into 3M (NYSE:MMM) as the stock reached attractive levels. We’d sold our shares in 3M last year when the price exceeded our estimated fair value, and as better opportunities to invest in presented themselves at the time. Nonetheless, we’ve always liked this business with its diversified revenues, its R&D leadership and its stable margins.
06. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders as of Q3, 2022: 59
An American multinational beverage company, The Coca-Cola Company (NYSE:KO) reported a 4% growth in its global unit case volume in the third quarter of 2022. Year-to-date, the company’s cash flow came in at $8.1 billion and its free cash flow amounted to $7.3 billion. Its revenue for Q3 also showed an 11% growth from the same period last year.
Atlantic Equities raised its price target on The Coca-Cola Company to $69 in December with an Overweight rating on the shares, highlighting the company’s strong execution and elevated growth.
The Coca-Cola Company currently pays a quarterly dividend of $0.44 per share. The company holds one of the longest dividend growth streaks of 60 years, which places it as one of the best dividend stocks on our list. The stock has a dividend yield of 2.76%, as of December 21.
As of the end of Q3 2022, 59 hedge funds in Insider Monkey’s database owned stakes in The Coca-Cola Company, with a collective value of $25 billion. Berkshire Hathaway was the company’s largest stakeholder, with 400 million shares.
Carillon Tower Advisers mentioned The Coca-Cola Company in its Q3 2022 investor letter. Here is what the firm has to say:
“Shares of The Coca-Cola Company (NYSE:KO) sold off with consumer staples even as the company reported strong pricing for the second quarter. On average, product prices rose with management hinting at further momentum.”
05. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders as of Q3, 2022: 66
Chevron Corporation (NYSE:CVX) is a San Ramon, California-based diversified, integrated oil company that is involved in the upstream, midstream, and downstream segments of the energy value chain. Chevron Corporation was able to capitalize on the high oil prices in the wake of Russia’s Ukraine invasion as it reported $11.2 billion in profits for its third fiscal quarter – almost double what the firm had raked in during the year-ago quarter. In the third quarter of 2022, Chevron Corporation distributed $2.7 billion in dividends to shareholders, up 6% from the same period last year. It currently pays a quarterly dividend of $1.42 per share and has a dividend yield of 3.25%, as recorded on December 21. The company has raised its dividends for 25 years in a row, which makes it one of the best stocks to buy for deflation.
Piper Sandler analyst Ryan Todd on December 19, maintained an Overweight rating on Chevron Corporation but lowered the price target on the shares to $199 from $206. “Even after two years of outperformance,” the analyst remains constructive on the energy complex into 2023.
66 of the 920 hedge funds polled by Insider Monkey for 2022’s September quarter had bought Chevron Corporation’s shares. Warren Buffett’s Berkshire Hathaway is Chevron Corporation’s largest shareholder. It owns 165 million shares that are worth $23 billion.
In its Q1 2022 investor letter, Diamond Hill, an asset management firm, highlighted a few stocks and Chevron Corporation was one of them. Here is what the fund said:
“Other top contributors in Q1 included multinational energy company Chevron Corp.. The company benefited from increased energy demand as COVID-related economic restrictions eased in tandem with concerns regarding supply interruptions related to Russia’s invasion of Ukraine.”
04. PepsiCo, Inc. (NYSE:PEP)
Number of Hedge Fund Holders as of Q3, 2022: 72
PepsiCo, Inc. (NASDAQ:PEP) is one of the best stocks to monitor in a deflationary economic situation. PepsiCo, Inc. has paid consecutive quarterly cash dividends since 1965, and 2022 marks the company’s 50th consecutive annual dividend increase. On November 17, the company declared a $1.15 per share quarterly dividend, in line with the previous. The dividend is payable on January 6, 2023, to shareholders of record on December 2.
On December 7, Argus analyst John Staszak raised his price target on PepsiCo, Inc. to $206 from $195 and maintained a Buy rating on the shares. The company is well-managed, offers a valuable brand portfolio, and continues to offer strong growth amid soft demand for many consumer staples; the analyst told investors. The analyst added that he expects cost-cutting to continue to benefit earnings and PepsiCo, Inc. to achieve its goal of $1 billion in annual cost savings.
According to Insider Monkey’s data, 72 hedge funds were bullish on PepsiCo, Inc. at the end of the third quarter of 2022, compared to 65 funds in the earlier quarter. Terry Smith’s Fundsmith LLP is the largest stakeholder of the company, with 7.14 million shares worth $1.16 billion.
Here is what Lindsell Train has to say about PepsiCo, Inc. in its Q3 2022 investor letter:
“At this point, it may help to give a further example of these self-reinforcing moats to illustrate the idea, drawing from the consumer franchises side of our portfolio. In our view, strong consumer brands can similarly exhibit Lindy compatible anti-ageing properties. Consider that the longer a company invests in its brands through advertising and R&D, the stronger and more resonant they may get. When successful, a self-sustaining feedback loop is established, whereby it becomes ever harder to recreate a heritage-rich brand from scratch, raising barriers to entry, and proportionately increasing its likely lifespan. There are plenty of long-lived portfolio franchises I could reference here, but I’ve gone with PepsiCo; partly because we have good time-series stats on it (beware data bias!) but also, as I hope will become evident, because Pepsi over its 129 years has succeeded in creating some wonderfully deep moats.
With Pepsi Cola you get the flagship soft drinks brand, which is both global and generational, but you also get the Frito-Lay salty snacks portfolio assembled alongside it, claiming nearly 40% of the global market. That’s ten-times greater than the nearest competitor and likely higher than the next 65 competitors combined. These are exceptionally strong global bands with market shares to match; the long-term empirical result being Pepsi’s dividend record which over the past 66 years (as far back as we’ve been able to go) has compounded at an annualized rate of 10%. Pepsi is no ‘in at the ground floor’ start-up today, but it wasn’t six decades ago either. Early growth investor Philip Fisher put it well when in 1958 (two years into Pepsi’s current winning streak) he wrote of “companies which in spite of outstanding prospects of major further growth are so financially strong, with roots going so deep into the economic soil, that they qualify under the general classification of ‘institutional stocks’”. PepsiCo fits this description well…” (Click here to see the full text)
03. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders as of Q3, 2022: 75
Exxon Mobil Corporation (NYSE:XOM) is a diversified energy company that not only produces crude oil and gas but is also expanding its presence in the renewables arena. Exxon Mobil Corporation raked in $19.6 billion in profits during this year’s third quarter, its highest earnings in history due to price pressure from the Ukraine invasion. Exxon Mobil Corporation has a 40-year run of raising its dividends. It currently offers a per-share dividend of $0.91 every quarter, with a dividend yield of 3.35%, as of December 27.
By the end of Q3 2022, 75 of the 920 hedge funds polled by Insider Monkey had bought Exxon Mobil Corporation’s shares. Exxon Mobil Corporation’s largest shareholder is Rajiv Jain’s GQG Partners, which owns 33 million shares worth $2.9 billion.
First Eagle Investments mentioned Exxon Mobil Corporation in their second-quarter 2022 investor letter. Here are the details:
“Integrated oil and gas giant Exxon Mobil performed well in the second quarter as continued high prices for energy products supported the stock. As the largest refiner in the US, the company has benefitted from wide “crack spreads,” or the margin between the cost of crude oil and the petroleum products extracted from it. Exxon continues to invest in refining capacity in the US, which industrywide has been in steady decline since 2019. We are pleased that Exxon has been using its strong cash flows to reduce debt and to return cash to shareholders through dividends and stock repurchases.”
02. AbbVie Inc. (NYSE:ABBV)
Number of Hedge Fund Holders as of Q3, 2022: 80
AbbVie Inc. (NYSE:ABBV) is an American biotech company that was formed after the spin-off of Abbott Laboratories in 2013. The company is one of the best stocks to buy for deflation. It has been raising its payouts consistently for the past 50 years. It currently pays a quarterly dividend of $1.48 per share and has a dividend yield of 3.63% as of December 27.
AbbVie Inc. was a part of 80 hedge fund portfolios in Q3 2022, up from 71 in the previous quarter. The stakes owned by these hedge funds have a total value of over $1.86 billion. With over 3.2 million shares, Arrowstreet Capital was one of the company’s leading stakeholders in Q3.
Baron Funds mentioned AbbVie Inc. in its Q3 2022 investor letter. Here is what the firm has to say:
“AbbVie Inc. (NYSE:ABBV) is a drug developer best known for Humira, an immunosuppressant that is the best selling drug of all time. Given outsized key product risk (patent cliff and generic launches beginning in 2023), AbbVie has broadened its pipeline, highlighted by its Allergan acquisition. Shares fell on results that missed consensus and indications that legacy franchises were outperforming newer product launches, calling into question AbbVie’s long-term strategy. With promising assets in the pipeline and its robust cash flow profile, we believe AbbVie will grow well into the future.”
01. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders as of Q3, 2022: 85
Topping our list of best stocks to buy for deflation is Johnson & Johnson. Johnson & Johnson is an American leading Big Pharma company that specializes in medical devices and offers other medical services. The stock delivered a 3.43% return to shareholders year-to-date, and its 12-month return came in at 4.57% as of December 27. Johnson & Johnson has raised its payouts for 60 years in a row. It currently pays a quarterly dividend of $1.13 per share and has a dividend yield of 2.55%, as of December 27.
On December 12, Citi analyst Joanne Wuensch raised his price target on Johnson & Johnson to $205 from $198 and kept a Buy rating on the shares. Looking into 2023, “many headwinds remain” for the North American medical supplies and technology group, but these should ease in the second half of next year, alleviating operating margin pressures, Wuensch tells investors in a research note.
As of the close of Q3 2022, 85 hedge funds in Insider Monkey’s database owned stakes in Johnson & Johnson, up from 83 in the previous quarter. The collective value of these stakes is over $5.4 billion. Among these hedge funds, Fisher Asset Management was the company’s leading stakeholder in Q3.
Here’s what Distillate Capital Partners LLC said about Johnson & Johnson in its Q2 2022 investor letter:
“Johnson & Johnson was among the 2 largest trims at around 1% each. Each stock was up 1% in the quarter compared to the 16% price decline for the S&P 500 and the positions were reduced as the valuations became somewhat less appealing, though still attractive enough to warrant inclusion.”
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This article is originally published at Insider Monkey.
