3 Top-Ranked Stocks to Buy for Upside in the Face of Inflation

Inflation remained stubbornly high in August as a multitude of factors continue to keep costs elevated across every pocket of the economy. The hot CPI figure, coupled with the Fed’s likely response and mounting economic downturn fears sent stocks tumbling last week.

Wall Street seems sure that the Fed will raise its key interest rate by at least 0.75% for a third-straight time when its two-day FOMC meeting ends on Wednesday, September 21. Traders now say there is an 82% chance of a 0.75% rate hike and a 18% chance of a 1% raise. The same CME FedWatch Tool placed just a 47% probability on a 75-basis point hike a month ago, with a 0% chance of a 100-basis point raise.  

Jay Powell and the Fed view tackling inflation as their top priority and are willing to cause pain when it comes to jobs and economic growth if that’s what it takes.

The Fed’s hawkish stance on rates and a flight to safety amid global economic slowdown worries is pushing 10-year U.S. Treasury yields back up to the decade-long highs of just under 3.5% that they hit in mid-June. Meanwhile, the 2-year Treasury has spiked all the way to 3.95% as Wall Street ups its bet on a higher Fed Funds rate.

Economic uncertainty is clearly unsettling and forcing many investors to the sidelines. But staying in cash comes with over an 8% fee at the moment, and U.S. Treasurys are still offering negative real returns when factoring in inflation.

Therefore, investors might consider buying stocks that have managed to up their earnings outlooks during the current bout of 40-year high inflation that also boast growth potential and upside.

Pure Storage PSTG

Pure Storage is an enterprise-level data storage and services company, with a “storage as-a-service" model that aims to "uncomplicate" data storage "forever." PSTG has expanded by helping its clients reduce complexity and put their data to better use.

Pure Storage topped Zacks estimates on August 31. Better yet, PSTG raised its outlook in the face of economic slowdown worries because companies can ill afford to cut back on something as essential as data storage.

Pure Storage’s positive bottom-line revisions help it land a Zacks Rank #1 (Strong Buy) right now. Current Zacks estimates call for its sales to climb 26% this year and another 15% next year to reach $3.2 billion. Meanwhile, its adjusted earnings are expected to surge 64% and 13%, respectively. And the cloud storage firm has crushed our bottom-line estimates over the last few years.

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Image Source: Zacks Investment Research

Pure Storage’s Computer- Storage Devices industry is in the top 15% of over 250 Zacks industries and it rocks “A” grades for Growth and Momentum in our Style Scores system. Wall Street is also very high on the stock with 13 of the 17 brokerage recommendations Zacks has coming in at “Strong Buys.”

Pure Storage’s current Zacks consensus price target offers nearly 35% upside to the roughly $28 per share it trades at the moment. PSTG management sees room for continued growth as enterprises struggle to “manage their exploding volumes of data” and look to PSTG for “simple, automated solutions.”

The Chefs’ Warehouse, Inc. CHEF

The Chefs’ Warehouse is a top distributor of specialty food products in the U.S. and Canada, with a focus on the higher-end side of the dining scene. The company aims to serve the “leading menu-driven independent restaurants, fine dining establishments, country clubs, hotels,” and beyond, carrying over 50k products to more than 35k customer locations. Overall, Chef’s Warehouse operates a rather resilient business that was only really stopped by covid lockdowns and restrictions

The Chefs' Warehouse topped Q2 estimates in late July and raised its 2022 guidance on the back of strong away-from-home dining, despite growing economic slowdown fears. There also appears to be plenty of upside since the hospitality and event segment isn’t back to its pre-pandemic levels yet. Plus, it is worth stressing that the higher-income consumers that fuel CHEF’s business are spending heavily despite inflation.

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Image Source: Zacks Investment Research

CHEF's revenue is projected to climb 41% this year and another 10% in FY23. Meanwhile, it’s expected to swing from an adjusted loss of -$0.05 per share to +$1.36 a share in 2022 and then climb 16% higher next year. And its upward earnings revisions help CHEF land a Zacks Rank #1 (Strong Buy) right now.

CHEF stock has soared over 130% in the last two years and is up 13% in the past 12 months. This run is part of a larger 100% climb in the past decade to outpace its Zacks Consumer Staples Sector’s 70%. At around $35 per share, the stock currently trades 34% beneath its current Zacks consensus price target. And it’s trading near its two-year lows at 22.6X forward earnings, which is also right around its 10-year median.

Ulta Beauty, Inc. ULTA

Ulta Beauty has been at the forefront of the beauty retail space for decades, selling cosmetics, fragrances, skin and hair care products, and much more across a variety of price points. Ulta posted double-digit revenue growth every year since its public debut in late 2007, outside of its pandemic-driven pullback.

Ulta is bouncing back from its covid slip as people return to their normal lives. Analysts raced to lift their EPS estimates following Ulta’s beat-and-raise quarterly release on August 25. Ulta’s upbeat EPS revisions help it land a Zacks Rank #1 (Strong Buy).

Ulta executives have seen durable trends in the beauty space despite slowing consumer spending and inflation headwinds throughout much of the economy, with it projected to post solid revenue and earnings growth in both FY22 and FY23.

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Image Source: Zacks Investment Research

Ulta stock is bucking the market’s downturn so far this year, having hit fresh records earlier this month. Plus, its current Zacks consensus price target offers around 17% upside. And the stock has managed to soar over 320% in the past decade and nearly 90% in the last two years. Still, it trades at a roughly 50% discount to its own 10-year highs and offers 30% value vs. its median at 18.5X forward earnings.

Ulta is set to repurchase roughly $900 million worth of stock in FY22, supported by a sturdy balance sheet and a strong management team. Crucially, Ulta shoppers aren’t cutting back yet. And a phenomenon known as the lipstick effect showcases a willingness for people to buy smaller fun products when they can’t splurge on big-ticket items.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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