23 Stock Picks to Buy: Investing Strategy for Inflation and Volatility – Business Insider

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  • Stocks fell at the end of this week as investors worried about higher and longer lasting inflation.
  • Julian Emanuel of Evercore doesn’t expect a recession, but he does expect more volatility.
  • He says these 23 stocks should perform well because of their sensible prices and high yields.

Stocks skidded at the end of last week as investors braced themselves for the latest report on inflation — and when it was released, it only confirmed some of their worst fears.

The Bureau of Labor Statistics announced on Friday that inflation hit a 41-year high in May as prices rose 8.6%. Investors had hoped that after a four-decade high inflation reading in March followed by a small decline in April the increases in prices were starting to decelerate. If inflation slowed, they thought, the Federal Reserve might take a break from raising interest rates and the economy might perform better.

But inflation isn’t hitting the brakes yet, which means the rate increases will last at least a bit longer and the economy is likely to slow further.

The losses wiped out the modest rally that stocks had enjoyed over the last few weeks, and once again left the benchmark S&P 500 index on the precipice of an official bear market , 20% below its highest close this January.

But Julian Emanuel, who leads Evercore’s equity, derivatives and quantitative strategy team and its portfolio strategy team, says that rally was “part of a non- Recession Bear Market bottoming process.” In other words, while the rally may be over for now, he believes that stocks will recover before too long.

He adds that the turmoil of the last few months is part of an ongoing “high volatility cycle” that will last for six years or so. With volatility elevated, and monetary conditions getting tighter, Emanuel says investors need to be prepared to buy stocks that look weak, sell those that are rising, hold onto cash, and use options strategies to protect themselves.

In a recent note to clients, he says that overall stock market valuations are going to fall, and value stocks, which are cheaper based on metrics like price to earnings ratios, should outperform.

“After 15 years of underperformance, we forecast that rising rates, elevated inflation and continued growth in 2022 would result in the transition to Value stock leadership from Growth. This trend change we expect to be measured in quarters or years,” he said.

The following is a group of 23 stocks that Emanuel expects to outperform as the year goes on because they’re trading at lower-than-usual valuations while delivering solid returns to investors in the form of dividend yields. He says those yields and their solid free cash flows should reduce their volatility, and recommends “patient buying” of these stocks.

The stocks are ranked from highest to lowest based on their estimated price to earnings ratios for 2022, as stocks with lower P/E ratios are considered less expensive. The free cash flow and dividend yield figures below are both for the last 12 months. 

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