Optimism over the Federal Reserve pausing its interest rate hikes in September has been soaring over the past few weeks but fresh inflation data released on Sep 13 might play spoilsport.

According to the latest Consumer Price Index (CPI) reading, the August inflation reading came in hotter than expected, raising fears that the Fed might continue with its monetary tightening campaign. Higher rates don’t bode well for the broader market. Given this scenario, investing in defensive sectors such as FirstEnergy Corp. FE, PNM Resources, Inc. PNM, PepsiCo, Inc. PEP, Atmos Energy Corporation ATO and J&J Snack Foods Corp. JJSF should be safe.

Inflation Soars in August

The Labor Department reported on Wednesday that CPI increased 0.6% in August on a month-over-month basis, higher than the 0.2% rise in July. Year over year, CPI rose 3.7% in August, higher than the consensus estimate of a rise of 3.6%.

The last time CPI increased more than 0.6% was in February 2022.

Core CPI, which strips out the volatile energy and food costs, rose 0.3%, higher than the economists’ expectations of a rise of 0.2%. Year over year, core CPI, increased 4.3%, in line with expectations and 40 basis points down from July’s reading.

However, core CPI still remains more than double the Fed’s target of 2%, which gives enough reasons to worry.

The constant rise in oil prices played a major role in the sudden rise in inflation in August. Energy prices jumped 5.6% in August, while gasoline prices soared 10.6%. Food prices increased 0.2%.

Rate Hike Fears Reignite

Oil prices worldwide have been on the rise in recent times, primarily due to the decision of major oil producers such as Saudi Arabia and Russia to extend supply cuts until December 2023.

Additionally, the improvement in China’s manufacturing activity has contributed to the upward trend in oil prices. This is significant because China’s economic growth is expected to lead to increased oil imports and a subsequent rise in demand for oil-related products.

The surge in oil prices triggered inflation in August as higher oil prices led to elevated transportation costs, which subsequently affected the prices of essential goods and services. Higher oil prices saw airfares jump 4.9% in August.

The Fed has already indicated that it is open to more interest rate hikes as inflation, despite sharply declining over the past year, remains elevated. And now the August inflation reading gives the central bank ample reasons to continue with its monetary tightening campaign.

The Fed has already increased rates by 525 basis points since March 2022 to take its benchmark rate to the range of 5.25-5.5%. Needless to say, more interest rate hikes don’t bode well for the economy and the broader market. Given this situation, investing in defensive stocks would be a wise decision.

Our Choices

In order to secure one’s portfolio, we have narrowed our search to five stocks from the defensive sectors such as consumer staples and utilities. Also, these stocks belong to the category of low-beta stocks (beta greater than 0 but less than 1). Hence, the recommended approach is to invest in low-beta stocks with a high dividend yield and a favorable Zacks Rank. Each of the stocks has a Zacks Rank #1 (Strong Buy) or 2 (Buy).

FirstEnergy Corp. is a diversified energy company. Through its subsidiaries and affiliates, FE engages in the transmission, distribution and generation of electricity.

FirstEnergy Corp has an expected earnings growth rate of 5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 60 days. FE currently has a Zacks Rank #2. FirstEnergy Corp has a beta of 0.45 and a current dividend yield of 4.35%.

PNM Resources, Inc., through its subsidiaries, is engaged in distributing energy and energy-related businesses in the United States. PNM operates through two segments — Public Service Company of New Mexico and Texas-New Mexico Power Company.

PNM Resources has an expected earnings growth rate of 1.1 for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days. PNM presently has a Zacks Rank #2. PNM Resources has a beta of 0.41 and a current dividend yield of 3.32%.

PepsiCo, Inc. is one of the leading global food and beverage companies. PEP’s complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. PepsiCo serves customers in more than 200 countries and territories.

PepsiCo has an expected earnings growth rate of 10.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days. PEP currently has a Zacks Rank #2. PepsiCo has a beta of 0.52 and a current dividend yield of 2.824%.

Atmos Energy Corporation, along with its subsidiaries, is engaged in the regulated natural gas distribution and storage business. ATO serves nearly 3.4 million customers in more than 1,400 communities in eight states, from the Blue Ridge Mountains in the East to the Rocky Mountains in the West. Atmos Energyoperates more than 72,000 miles of transmission and distribution lines as well as 5,700 miles of interstate pipelines.

Atmos Energy has an expected earnings growth rate of 8.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last 60 days. ATO presently has a Zacks Rank #2. Atmos Energy has a beta of 0.62 and a current dividend yield of 2.60%.

J&J Snack Foods Corp. is an American manufacturer, marketer and distributor of branded niche snack foods and frozen beverages for the food service and retail supermarket industries. Manufactured and distributed nationwide, JJSF’s principal products include SUPERPRETZEL, BAVARIAN BAKERY and other soft pretzels, ICEE and SLUSH PUPPIE frozen beverages, LUIGI’S, MINUTE MAID frozen juice bars and ices, WHOLE FRUIT sorbet and frozen fruit bars.

J&J Snack Foods’ expected earnings growth rate for the current year is 62.3%. The Zacks Consensus Estimate for current-year earnings has improved 16.4% over the past 60 days. JJSF currently carries a Zacks Rank #1. J&J Snack Foodshas a beta of 0.55 and a current dividend yield of 1.66%.
FirstEnergy Corporation (FE): Free Stock Analysis Report

PepsiCo, Inc. (PEP): Free Stock Analysis Report

Atmos Energy Corporation (ATO): Free Stock Analysis Report

PNM Resources, Inc. (PNM): Free Stock Analysis Report

J & J Snack Foods Corp. (JJSF): Free Stock Analysis Report

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