These stocks have the strong margins and pricing power to withstand a reacceleration in inflation

Published Tue, Apr 9 20241:40 PM EDTUpdated Tue, Apr 9 20242:06 PM EDT

Investors may want to pick up shares in companies that can withstand a possible inflation comeback. The second quarter is off to a rough start as investors have become increasingly wary about higher-for-longer interest rates and stickier inflation. The S & P 500 is down 1.5% so far this month, while the 30-stock Dow has lost nearly 3% and the Nasdaq has shed 1.1%. Prices of most commodities, from gold to crude oil, have also increased to new highs in recent weeks, adding to investors' worries. Investors' are therefore looking to Wednesday's consumer price index release — which gauges the average change over time in the prices people pay for goods and services — for further clues on the state of inflation. Economists surveyed by Dow Jones expect inflation to have increased 0.3% in March on a month-over-month basis. Wall Street will also use the report to assess how many times the Federal Reserve will cut interest rates. If the data points to easing price pressures, rate cut expectations will rise. Otherwise, investors will price rate reductions out of the market. Against this market backdrop, we used the CNBC Pro Stock Screener to search for stocks with the pricing power and cost controls to handle a potential inflation reacceleration. These names have also showed reliable earnings growth during the post-pandemic inflation spike. Additionally, they have low debt and strong balance sheets that should keep the company resilient if interest rates rise. Here's the criteria these stocks meet: They have among the highest gross margins in the S & P 500, at above 60%. Their annual earnings per share growth over the last three years is more than 15%. Their debt-to-equity ratio is less than 40%. Take a look at the list of companies below: At 143.2%, digital workflow company ServiceNow has the highest projected three-year earnings per share growth of the list and a fairly low debt-to-equity ratio of 19.5%. Shares have gained 10.1% this year, fueled by enthusiasm around its expanded generative AI services. Stifel analyst Brad Reback kept his buy rating ahead of ServiceNow's first-quarter earnings slated for April 24. "Looking forward, our checks pointed to better-than-expected 2Q deal pipelines," Reback wrote in an April 3 note. "Large enterprises who had historically been averse to 3rd party solutions and relied on home-grown ITSM/ITOM platforms, are beginning to make the shift to ServiceNow's product set given the reliability, sustainability, and breadth of solutions found within the platform." Arista Networks has zero debt and a gross margin of nearly 62%, making it a favored stock during times of high inflation. Shares of the computer networking company have jumped more than 23% this year, and its earnings are expected to grow 48.8% over the next three years, per the CNBC Pro Stock Screener tool. The consensus rating on the stock is a buy, per LSEG. However, the average price target implies upside of less than 2%. Goldman Sachs reiterated its buy rating on the stock in a March 22 note. The firm also raised its price target on Arista from $313 to $356 due to higher confidence in its consensus revised estimates for 2024/2025, citing Arista's continued growth in its AI-related products and growing capital expenditures from 'cloud titan' customers who could support the company's revenue guidance. Nvidia also made the list, even though the stock has seen a 6.2% pullback this quarter. The darling chipmaker has gross profit margin of 72.7% and high levels of earnings growth. Other stocks that made the cut are Cadence Design Systems , Intuitive Surgical and Old Dominion Freight Line .