Market watchers have been calling for an earnings recession since the end of 2022. That’s because there’s an expectation that high inflation coupled with rising interest rates could lead to contracting earnings. With that, there are still opportunities to be found. So, what’s the best way to spot high-profit stocks in this situation? One way might be to look at inflation. While inflation is bad for some stocks, some stocks are a good inflation hedge. Investors should look for companies that continue to grow their earnings despite inflation. This shows pricing power and brands that consumers will continue to seek out.
And since markets are forward-looking, now may be a good time to consider stocks in sectors that have been beaten down because of inflation. These sectors tend to be the first to recover and, if they offer a compelling dividend, can be a good hedge against inflation. Here are seven high-profit stocks to look at for the second half of 2023 and beyond.
Two energy stocks lead off this list of high-profit stocks. The first of those is Chevron (NYSE:CVX). After being one of the best-performing sectors in 2022, energy stocks have been lagging behind the market in 2023. Crude oil prices are finding it hard to crack the $70 mark despite OPEC announcing production cuts.
But so far, that hasn’t prevented big oil stocks from generating solid profits. For its part, Chevron posted earnings per share of $3.55 in the first quarter of 2023. Analysts are now forecasting full-year EPS of $15.11 which would be 9% higher than for the full year in 2022. And don’t forget that Chevron prioritizes its shareholders when it comes to what to do with that profit. The company continues to buy back shares at a rate that delights shareholders (like Warren Buffett) and infuriates Congress.
Yet, CVX stock is down 10% in 2023. That disparity between earnings growth and stock price performance should get the attention of investors. Particularly if you believe that oil prices are likely to rise as the economy recovers. And even if oil prices remain sluggish, you’ll be able to pocket a healthy dividend from this Dividend King that currently pays $6.04 per share on an annual basis.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) is another big oil stock that makes this list of high-profit stocks. To be fair, you can largely copy and paste the points I made with Chevron for XOM stock. But there’s another story that caught my eye as it relates to Exxon Mobil. Specifically, the oil giant is partnering with Tetra Technologies (NYSE:TTI) to develop over 6,100 lithium-rich acres in Arkansas. Tetra had previously made a deal with Saltwerx – a subsidiary of Exxon Mobil – to develop the acreage.
Lithium is in high demand as a crucial asset needed to produce a variety of items such as the lithium-ion batteries that are the de facto standard for electric vehicles. And traditional energy companies continue to look for ways to diversify into renewable energy. Partnering with Tetra allows Exxon to play off its core competency in drilling. It also gives the company a foothold in the growing lithium space in the United States at a time when the government is doling out incentives to onshore the lithium supply chain. As of this writing, XOM stock is down 3% for the year. But that comes after a strong rally in the last week of the quarter.
Tech stocks have been on an AI-fueled tear this year and Microsoft (NASDAQ:MSFT) is one of the names leading the charge. MSFT stock is up 39% for the year which mirrors the performance of the NASDAQ index. Currently, any company that has anything to do with artificial intelligence is making sure investors know about it. Microsoft doesn’t have to work that hard. The company’s leadership in generative AI will continue with its multi-year, multi-billion investment in OpenAI. The company’s stock will likely serve as a proxy for the entire sector.
But Microsoft was a cash cow before AI and they’ll continue to be a cash cow afterwards. Analysts project the company will increase revenue by approximately 11.8% on a year-over-year basis. The company gives investors optionality with several ways to generate revenue. And that story will hold up whether or not the company’s proposed deal to buy Activision Blizzard (NASDAQ:ATVI) is denied by regulators.
Despite being down from its 2022 highs, inflation remains sticky in particular areas such as food. That’s a good reason to put Kroger (NYSE:KR) stock on your shopping list when you’re looking for high-profit stocks. The company missed slightly on revenue in the first quarter, but it beat the bottom line. And both revenue and earnings were higher on a year-over-year basis.
Consumer spending has held up but continues to shift away from discretionary items as consumers are forced to spend more on essentials. But those are the consumers that Kroger can capture. And it will benefit as consumers will continue to trade down if the economy teeters into recession in the second half of the year. Like Microsoft, Kroger’s proposed acquisition of Albertsons (NYSE:ACI) is being held up and may not pass muster. But even if it does fall through, investors are getting a stock that trades at about 10.5x forward earnings. Plus, investors get a secure dividend that currently yields 2.25% and the company has increased it for 16 consecutive years.
Mondelez (NASDAQ:MDLZ) is another company that serves as an inflation hedge for investors. First, the company is expected to post year-over-year earnings growth of approximately 9%. And after beating on both the top and bottom lines in the first quarter of 2023, many analysts have raised their price target for MDLZ stock.
That highlights the diversity of the company’s products which includes the Oreo and CLIF bar brands. It also showcases the company’s ability to leverage the popularity of its brands to pass along its rising input costs to consumers. And as most investors, who are also consumers, know once prices go up, they take a long time to come back down.
At approximately 22x forward earnings, Mondelez is not trading at a discount. But the consumer staples sector has been outperforming the broader market, so there’s room for Mondelez to move higher. And it does offer a reasonable dividend with a 2.13% yield.
PepsiCo (NASDAQ:PEP) is another ideal choice for investors looking at high-profit stocks. You’ll notice a familiar theme with Pepsi. The company is projected to post a year-over-year increase in earnings of about 8%. It’s also coming off a first quarter when it beat expectations on the top and bottom lines.
Pepsi is best known for its iconic soft drink brand. However, what differentiates Pepsi from its competitors is its snack food division. And the strength of those brands allows Pepsi to pass along its higher input costs to its customers. Plus, the company continues to spend aggressively on advertising and marketing. PEP stock trades at 25x forward earnings which is a premium to the market. But the stock has increased more than 67% over the last five years. That doesn’t include the dividend. Pepsi is a Dividend King that has increased its dividend in each of the last 52 consecutive years.
Tapestry (NYSE:TPR) sells leather goods under the Coach, Kate Spade, and Stuart Weitzman brands. The company falls into the high-end retail sector which has been holding up decently despite sticky inflation. The company is expected to grow earnings about 7% year-over-year. In the first quarter of 2023, the company beat expectations on both its top and bottom lines.
Tapestry may not be a true luxury company, and TPR stock may not be a long-term choice for investors. Nevertheless, it’s an intriguing short-term play on consumer spending as consumers look for high-end brands even as they continue to look for ways to fight inflation. Plus, investors shouldn’t overlook the stock’s tempting valuation. It trades at just 11x earnings and has a dividend that currently yields approximately 2.8%.
On the date of publication, Chris Markoch had a LONG position in CVX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.