Inflation rose in March to its highest level in nearly a year, as the conflict with Iran sent energy prices soaring. The jump was expected, but, at the same time, it poses a major challenge for the Federal Reserve in deciding its future monetary policy path after having paused rate cuts this year.
Although inflation rose marginally if energy and food costs are excluded, the ongoing geopolitical tensions are likely to keep markets volatile. Also, the fragile two-week ceasefire between the two warring nations is already seen as crumbling, with no peace deal reached.
Given this scenario, we recommend buying five defensive stocks from the utility and consumer staples sectors, namely, Atmos Energy Corporation ATO, American States Water Company AWR, Keurig Dr Pepper Inc. KDP and Entergy Corporation ETR.
These stocks have seen positive earnings estimate revisions in the past 60 days, carry a Zacks Rank #2 (Buy), and are set for solid returns. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Inflation Surges Amid Iran Conflict
The consumer price index (CPI) jumped 0.9% sequentially in March from February’s rise of 2.4%, the Commerce Department reported last week. This takes the annual inflation rate to 3.3% and, the highest level since May 2024. Inflation rose 0.3% in February.
Also, this is the highest monthly increase since June 2022. Although the reading came in line with analysts’ expectations, the jump now makes the Federal Reserve’s job even more challenging, as it is not sharply higher than the central bank’s 2% target.
February’s jump was primarily fueled by a 10.9% surge in energy costs. Core CPI, which excludes the volatile food and energy, rose a meager 0.2% month over month in March and 2.6% from the year-ago levels. Both the readings were 0.1% below the consensus estimate.
The U.S.-Iran conflict took a toll on stocks throughout March, and the broader market started making a rebound only last week after both countries announced a two-week ceasefire and the reopening of the Strait of Hormuz, a key passage for the majority of the global oil shipments.
However, the tensions are far from over as the United States started a sweeping naval blockade of the Strait of Hormuz earlier this week after peace talks with Iran failed. Oil prices have also been volatile over the past few days and remain sharply about $100 per barrel.
The jump in inflation has also dashed hopes of an interest rate cut anytime soon, with several Fed officials now considering a rate hike. It is unlikely that oil prices will stabilize until a peace deal between the two warring nations is reached.
4 Low-Beta Defensive Stocks With Growth Potential
Atmos Energy Corporation
Atmos Energy Corporation, along with its subsidiaries, is engaged in the regulated natural gas distribution and storage business. ATO serves nearly 3.3 million customers in more than 1,400 communities across eight states from the Blue Ridge Mountains in the East to the Rocky Mountains in the West. Atmos Energyoperates more than 73,000 miles of transmission and distribution lines as well as 5,700 miles of interstate pipelines.
Atmos Energy has an expected earnings growth rate of 10.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.2% over the last 60 days. ATO has a beta of 0.69 and a current dividend yield of 2.10%.
American States Water Company
American States Water Company, along with its subsidiaries, provides fresh water, wastewater services and electricity to its customers in the United States. AWR principally works through its two major subsidiaries — Golden State Water Company and American States Utility Services.
American States Water Company has an expected earnings growth rate of 6.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the last 60 days. AWR has a beta of 0.66 and a current dividend yield of 2.54%.
Keurig Dr Pepper Inc.
Keurig Dr Pepper Inc. is a prominent integrated brand owner, manufacturer and distributor of beverages across the United States, Canada, Mexico and the Caribbean. KDP’s extensive portfolio features well-known brands such as Dr Pepper, Canada Dry, Green Mountain Coffee Roasters, Snapple, Mott's, The Original Donut Shop, Clamato, Core Hydration, and the Keurig brewing system.
Keurig Dr Pepper has an expected earnings growth rate of 11.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.6% over the last 60 days. KDP has a beta of 0.35 and a current dividend yield of 3.46%.
Entergy Corporation
Entergy Corporation is primarily engaged in electric power production and retail distribution of power. ETR has a 30,000-megawatt (MW) generating capacity, including more than 8,000 MW of nuclear fuel capacity.
Entergy Corporation has an expected earnings growth rate of 12.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 60 days. ETR has a beta of 0.57 and a current dividend yield of 2.20%.
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This article originally published on Zacks Investment Research (zacks.com).