Stocks to buy

3 Stocks That Will Benefit Most From Cooling Inflation

The United States Consumer Price Index data for February aligned with expectations, with the core reading coming in at 5.5%. The report suggests that inflation is cooling at a moderate pace, and the market is now pricing anywhere from a pause to a 25 basis-point hike at the next Federal Open Market Committee meeting.

In contrast, the current inflation rate at 6% does remain much higher than the Federal Reserve’s long-term 2% goal. Thus, it may take some time for lagging sectors, such as shelter inflation, to bring down the overall rate gradually.

The banking sector remains volatile, but various Federal “bailouts” have effectively contained any contagion risk within regional banks. Moreover, energy prices are back to pre-pandemic levels, with the price of crude oil declining. The economy seems to be on the right track.

With that in mind, here are three stocks to buy for those expecting inflation to continue to fall from here.

AMZN Amazon $94.74
GOOG Alphabet $95.28
SWK Stanley Black & Decker $78.76

Amazon (AMZN)

Source: Benny Marty / Shutterstock.com

Cooling inflation is solid news for Amazon’s (NASDAQ:AMZN) e-commerce business. Once consumers have room for more discretionary spending, e-commerce consumption will pick up. Indeed, Amazon is the leading player in this industry, and coupled with its fast-growing cloud segment, AMZN stock will likely deliver robust gains in a dis-inflationary environment.

The company’s CFO perfectly summarizes why inflation hits Amazon hard: “In our worldwide stores business, with the ongoing economic uncertainty, coupled with the continuation of inflationary pressures, customers remain cautious about their spending behavior. We saw them spend less on discretionary categories and shift to lower-priced items and value brands in categories like electronics. We also saw them continue to spend on everyday essentials, such as consumables, beauty, and softlines.”

Thus, with purchasing power coming back, Amazon can take its margins higher. Its current stock price, at less than $95 per share, is a bargain when you consider the potential profits it will generate in a few years.

Alphabet (GOOG)

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Alphabet (NASDAQ:GOOG) is another business that has suffered under high inflation. Marketing is among the easiest expenses to cut back on when times are tough, and we have seen that happen over the past year. Almost all businesses felt the margin pinch, and started to cut back on expansion, with the focus shifting to profitability. These marketing cuts directly impacted Alphabet’s advertising business, which accounts for a massive 80.2% of its revenue.

Even worse, Microsoft (NASDAQ:MSFT) is contesting Google’s search dominance by integrating ChatGPT into its search engine. Google then made a blunder by rushing the release of Bard, and its share price took a dive.

Despite that, things are starting to look up for Alphabet. The ad market is beginning to show signs of stability as businesses recover. The Bing-ChatGPT integration also hasn’t meaningfully changed the status quo yet, as almost everyone is accustomed to using Google.

Furthermore, Alphabet is changing hands at a price-earnings ratio of 20-times. This is a once-in-a-decade opportunity to snap up the discounted stock before more businesses pump up the marketing spend.

Stanley Black & Decker (SWK)

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Stanley Black & Decker (NYSE:SWK) is turning a corner after a 64%-plus decline from mid-2021 levels. The greatest news for the company is the decline in commodity price levels and the increase in infrastructure spending.

Inflation that has driven up commodity prices is a headache for the company. That’s because Stanley Black & Decker is a leader in manufacturing construction tools, a segment that has been booming of late due to the $1 trillion Bipartisan Infrastructure bill. However, with high raw material prices, Stanley Black & Decker could not maximize profitability in its tools business. It will be a completely different case in a few months as inflation cools.

The company’s CEO stated,

“Our margins were significantly impacted by inflation, and when we chose to prioritize inventory reductions by lowering manufacturing production levels in this last four to five months of 2022, this was to allow us to generate solid free cash flow as we experienced in the fourth quarter. These negative profitability impacts resulted in a full year adjusted diluted earnings per share being down year-over-year to $4.62.”

For 2023, Stanley Black & Decker expects $500 million to $1 billion in free cash flow this year. Additionally, the company expects gross margins to improve to the mid-to-high 20% range from the current 20% level seen in the last two quarters of the year. The stock has significant upside potential considering its current price-earnings ratio of nearly 12-times.

Finally, it also has a 3.94% forward dividend yield with 55 consecutive years of dividend increases. There’s a lot to like about this potential beneficiary of declining inflation.

On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Omor Ibne Ehsan is a writer at InvestorPlace. He is also an active contributor to a variety of finance and crypto-related websites. He has a strong background in economics and finance and is a self taught investor. You can follow him on LinkedIn.