Tickers in this Article: KO, JNJ, MSFT, KFT, PG, NSRGY
While the markets remain buoyant, the economy does face some pending headwinds. Inflation is a top concern, and a quick trip to the gas pump or a walk down the produce aisle of your local grocery store should make you a believer. Another concern is the inevitable rise in interest rates. And of course, since markets have been bullish for two years, there is always the concern that they are due for a decline.

Tutorial: Guide To Stock Picking Strategies

What to Look For
In order to combat inflation, you want to find businesses with pricing power. To mitigate the threat of higher interest rates, you want to find businesses that will not need to borrow heavily over the next few years in order maintain their competitive edge. Naturally, such qualities are not found in many businesses. With regards to pricing power, it's even more rare to find. But pricing power does exist with a name like Coca-Cola (NYSE:KO). Despite trading at a 52-week high, shares do trade at a decent 13-times earnings and yield 3%. That is not a bad price to pay for a company that has a 40% return on equity and 25% profit margins. Coke's above average ROE and net margins are proof positive that the company has unique competitive advantages.

Microsoft (Nasdaq:MSFT) is a name that likely won't be harmed by a rise in interest rates. The company is essentially a cash holding giant. With nearly $40 billion in cash and $10 billion in debt, Microsoft does not need to borrow to finance its growth needs. In fact, during this low interest rate environment, MSFT has actually borrowed funds in order to pay out dividends to its shareholders. Microsoft can do this since it generates over $15 billion of free cash flow per year.

Staples are Stable
If you want to invest in the midst of this economic concern, then consider businesses who products are not impulse or discretionary purchase decisions. Johnson & Johnson (NYSE: JNJ) is one such name. Products like Band-Aid and Tylenol are not impulse buys. JNJ sells thousands of products worldwide that are non discretionary in nature. The company pays a near 4% dividend to go along with a stock that trades at 12-times earnings. In fact, many of the blue chip staple stocks remain relatively attractive to the overall market. Companies like Kraft (NYSE:KFT), Procter and Gamble (NYSE:PG) and Nestle (OTC:NSRGY.PK) have decent valuations and often pay yields above the 10-year US Treasury. (For more, see 5 Consumer Staple Stocks To Watch.)

The Bottom Line
These stocks won't give Apple-like annual returns, but when times are tough and the market is painful, their businesses (and investors) can weather the storm. (For more, see 4 Cheap And Safe Stock Picks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center