Here’s a little twist for those who like to focus on fundamentals and economic forces when predicting the stock market. When inflation runs hot, it benefits stocks overall, and the opposite is true. Inflation brings on higher earnings through pricing power and margin expansion for most businesses, and the weakening impact it has on the dollar drives stock prices higher.

However, not all stocks are made equal. Some actually suffer during inflation as they cannot keep up with economic growth. The same is true when slowing inflation hits the economy. Instead of placing a bearish bias on the whole S&P 500, investors can apply some fundamental reasoning to find potential stocks that may outperform during the next couple of quarters.

Operating in the consumer staples sector, stocks like Coca-Cola Co. KO offer some growth potential as they have enough pricing power and international reach to cushion the falling inflation rates in the United States. Others, like Realty Income Co. O, offer investors stable income during times when income loses its power. Moving outside this real estate investment trust (REIT), the healthcare sector offers some additional upside in shares of Pfizer Inc.

Coca-Cola: The Fortress Stock Every Investor Needs in Their Portfolio

Investors can always expect Coca-Cola to deliver stability and potential growth during most cycles, whether the economy is booming or busting and whether inflation is running hot or cold. Even as inflation slows down through a 2.2% PCE measure, compared to over 3.5% a year ago, Coca-Cola’s scalability offers a few benefits.

Serving over a billion Coca-Cola products daily, the company can significantly increase its revenue and earnings by raising prices yearly just to keep up with inflation, plus a small premium enabled by the Coca-Cola brand penetration in the beverage market.

This is why some on Wall Street have started to gain a bullish view in the stock, led by analysts at Wells Fargo through their “Overweight” rating as of September 2024. This time, they placed a $78 price target on Coca-Cola stock, calling for a net upside of 9.8% from where the stock trades today, not to mention a new 52-week high.

Being a $309 billion giant has other perks, too. Investors can now enjoy a $1.94 a share payout from the company, which translates into an annualized dividend yield of 2.7% to beat the slowing pace of inflation today. The bullish sentiment toward Coca-Cola didn’t stop there, however.

Institutional buyers like Legal & General Group decided to boost their holdings in Coca-Cola by 2.9% as of August 2024, bringing their net investment up to $2.46 billion today, or nearly 1% ownership in the company. Behind this wall of institutional ownership is Warren Buffett, of course, who has owned Coca-Cola for decades now.

Safety and Income: Why Realty Income Is a Must-Have for Your Portfolio

The real estate sector is often seen as a stable and protective space for capital to be put to work. Realty Income might be a good choice for investors to consider today.

There’s a reason analysts at Stifel Nicolaus decided to place a $70.25 price target on this REIT recently, calling for up to 12.6% upside from where it trades today.

This potential upside matches what most investors would expect to receive from the S&P 500 every year, but there’s an added bonus. Through its high-quality tenants, the company’s property portfolio now offers investors a $3.16 per share payout.

That’s the nice thing about investing in REITs, as shareholders can now lock in a dividend yield of 5.1%, over twice as much as the PCE inflation rate. More than that, Wall Street analysts now expect to see Realty Income stock deliver major earnings per share (EPS) growth of 280% in the next 12 months.

Pfizer: The Reliable Choice Through Economic Booms and Busts

The healthcare sector is another space where investors can almost buy and forget through every economic cycle; after all, it’s one of the basic human necessities. Within this niche, Pfizer offers a special deal for investors to consider today, especially after Wall Street targets are taken into consideration.

Now trading at 85% of its 52-week high, it opens up enough of a gap for the stock to return to its previous high levels. More than that, analysts at Cantor Fitzgerald decided to reiterate their “Overweight” rating on Pfizer stock, not only that but also landing on a $45 price target for the company today.

The stock would need to rally by as much as 57.3% from where it trades today to prove these targets right. This may not be a REIT stock, but it shares some of its benefits; Pfizer now offers to pay a $1.68 dividend per share for an annual dividend yield of 5.9% above inflation.

As a last check, investors can note the discount against the rest of the medical sector’s average valuation today. On a price-to-book (P/B) multiple, Pfizer trades at 1.8x, which is well below the sector’s average P/B valuation of 4.8x. This is where most of the upside could be coming from.

The article “3 Stocks Set to Benefit from Cooling Inflation Trends” first appeared on MarketBeat.