What Stagflation Means For Investors and These Stocks

Key Points

• Stagflation risks are starting to trickle into the market's sentiment and narrative, and investors need to understand what that means for them.
• Two areas in the market stand out as a potential place to hedge these risks, with specific stocks to be kept.
• Value and growth are the credo during stagflation, and here are the top picks to escape this theme.

When the market narrative becomes too widely accepted, excess seems to be created in some areas of the economy as businesses prepare for what’s coming their way. Today’s stock market seems to be focused on one theme and one theme only: stagflation. This rare economic condition, not seen since the 1970s, poses a particular risk for investors, though not one that can’t be hedged or managed.

But before investors learn about these strategies and safety stocks, they must first understand stagflation. Simply put, it is an economic state of low economic growth as measured by the GDP numbers, other business activity readings, and an elevated inflation rate, hence the name's stagnant nature.

With this in mind, investors can make sense of some of the decisions behind recent buying and selling activity from investors like Warren Buffett, who decided to sell names like Apple Inc. NASDAQ: AAPL and Capital One Financial Co. NYSE: COF to express his concerns in cyclical names. However, buying energy stocks like Occidental Petroleum also gave investors a safer route to profit if stagflation happens.

Why Energy Does Well in Stagflation

There is a basement level of business activity that will never really go away. People will still need fuel and energy no matter whether the economy is booming or busting, meaning oil demand will never really fall below the minimum needed to keep companies pumping out profits.

Buffett knows this, which is why he chose to go into the sector, but there are other choices investors can consider. For those uncomfortable with picking individual stocks, the broader Energy Select Sector SPDR Fund NYSEARCA: XLE offers more diversification and lower volatility potential. Then there are other, more aggressive choices.

Moving up in the oil industry’s value chain, investors can land on the oil drilling names for upside, and that’s where shares of Transocean Ltd. NYSE: RIG come into consideration. Standing at the forefront of drilling equipment leasing and manufacturing, here’s why this company stands to make a few investors happy.

3 Reasons Transocean Beats Stagflation

First, as the United States enters a potential stagflation scenario, where commodities like gold do well against a weakening dollar, related products like oil also follow the same upward path. Considering the long-term correlation between gold and oil has been closer to 90%, today’s divergence calls for a massive rally in oil.

Second, Wall Street analysts share the same view. As of February 2025, the consensus price target is set at $5.75 per share, which calls for a rally of up to 95% from where the stock trades today, justifying some of the recent institutional buying. After a 1.2% boost in Transocean holdings by the Vanguard Group, a stake of $295.5 million today, or 9% ownership in the company, shows investors where the so-called “Smart money” is looking to bet today.

Third, the company offers investors a tremendous discount. As price action goes, the stock now sits at 43% of its 52-week high, pricing in some of the worst-case scenarios for the entire oil industry and giving shareholders a fantastic risk-to-reward setup. More than that, there is a fundamental discount to exploit today.

According to the company’s latest earnings presentation, the backlog of orders outstanding today is $8.4 billion and expected to be converted within 12-18 months. Considering the company’s market capitalization is only $2.5 billion today, that prices in a forward sales multiple of only 0.3x, reiterating the low-risk opportunity to outrun stagflation.

A Worthy Mention in This Value Stock

To beat stagflation, investors must tap their portfolios into growth opportunities and significantly compress their downside, such as in the already discussed Transocean setup. However, only the business side has been covered, and now it’s time for the consumer end of things.

This is where PepsiCo Inc. NASDAQ: PEP comes into play today. As part of the consumer staples sector, it provides certain stability while also offering enough earnings per share (EPS) growth at a discount to mitigate some of the potential stagflation risks today.

Wall Street analysts now forecast up to $2.52 in EPS for the third quarter of 2025, a significant boost from today’s $1.96 reported EPS. With this sort of growth in mind, it’s time to consider the downside.

Today’s forward price-to-earnings (P/E) ratio of 18.5x on Pepsi stock would be the lowest since 2018 and significantly below the 23.0x longer-term average. This is why the consensus price target is also set at $171.5 today, calling for up to 11.7% upside from where Pepsi trades today, another excellent risk-to-reward setup.