Stocks to Watch as February's PPI Data Comes in Hotter Than Expected

As a brief overview, the Producer Price Index (PPI) is an official U.S. inflation metric that measures how much prices are changing for producers, specifically the prices domestic businesses receive for the goods and services they sell.

The U.S. Bureau of Labor Statistics reported on Tuesday that Final demand prices for finished goods and services moved up 0.7% month over month, the hottest monthly reading since this past July. On an adjusted basis, the Final demand index rose 3.4% year over year, the largest yearly increase since last February.

Higher-than-expected PPI readings generally boost the pricing power and margins of certain basic materials companies, especially those tied to commodities that rise with inflation. The higher selling prices for services and goods can of course, extend to the consumer staples, construction, and tech sectors.

That said, here is a breakdown of the markets and stocks that could be most positively exposed to an inflationary increase after February’s hot PPI reading.

Metal Producers & Miners

When inflation rises, metal prices often move up as investors seek real-asset hedges, and this can also signal broadening goods inflation and strong industrial demand for steel or iron producers as well.

Ironically, gold and other precious metal prices haven’t provided the hedge they typically do, especially with economic and political risk-related volatility ripping through the stock market of late. Still, it could be an opportunistic time to buy some of the top gold and silver mining stocks on the dip, as their operating leverage should remain favorable even with these precious metal prices descending from historic highs during an environment where they normally keep rising.

Regarding steel producers, NWPX Infrastructure NWPX stands out with a Zacks Rank #1 (Strong Buy). NWPX is a specialty steel producer for water-related infrastructure products, including steel casing pipes, bar-wrapped concrete cylinder pipes, pipeline system joints and fittings.

With NWPX benefiting from margin expansion driven by pricing power, it’s noteworthy that the index number value for iron and steel selling prices rose in February and remains relatively elevated after hitting a peak in 2022.

Image Source: Federal Reserve Economic Data

Chemical Producers & Fertilizers

Chemical producers can experience a mixed effect during higher inflation. Some benefit from higher selling prices, but others suffer margin compression if feedstock costs rise faster than product prices.

However, DuPont de Nemours DD is a diversified chemical producer that sticks out with a Zacks Rank #1 (Strong Buy). DuPont provides technology-based materials, ingredients, and solutions to a variety of industries. Making its strengthening outlook more attractive is that DuPont's stock trades at a reasonable 19X forward earnings multiple and offers a 1.82% annual dividend yield.

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Notably, fertilizer prices often rise with natural gas costs and food inflation, both of which were present in February’s PPI data. Higher agricultural inputs could make a leader like CF Industries CF attractive, which currently lands a Zacks Rank #3 (Hold) as one of the largest global manufacturers and distributors of nitrogenous fertilizer and other nitrogen products.

Undervalued Vegetable Processors

February’s PPI data showed a 2.4% monthly increase in food selling prices, driven by an unusually high spike in fresh and dry vegetables (48% monthly increase). Sporting a Zacks Rank #2 (Buy), Conagra Brands CAG is a packaged foods company to watch as it owns Birds Eye, one of the largest vegetable brands in the U.S.

Conagra’s stock has also made the case for being oversold, trading near multi-year lows of $15 a share and at under 10X forward earnings. At current levels, Conagra offers a very lofty 9% dividend yield, bolstering its value to income investors.

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B&G Foods BGS is another attractively priced consumer food stock that is a major producer of vegetables through its Green Giant brand. At $4 a share, B&G stock trades at a 9X forward earnings multiple with EPS expected to rise 6% this year and projected to increase another 9% in FY27 to $0.59.

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This article originally published on Zacks Investment Research (zacks.com).

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