Inflation Could Be Coming Back. 2 Stocks To Buy Now

Producer prices rose 0.7% month-over-month in February (consensus 0.3%), with PPI up 3.4% year-over-year and core PPI +3.5% y/y, signaling hotter wholesale inflation than expected. Oil/gas prices have spiked roughly 27% since the war in Iran and fertilizer costs have surged, creating upside risk to consumer inflation via higher transportation and food costs; stocks ticked down modestly on the print. The piece recommends defensive retail plays: AutoZone (countercyclical aftermarket demand, 3.3% comparable sales, ~50% fewer shares outstanding over the last decade from buybacks) and Dollar General (20,000+ stores, comps +3% in 2025, inventories down 7%, 2026 comps guidance 2.2–2.7%, forward P/E <18) as potential inflation-resistant exposures.

Analysis

Geopolitical-driven input-cost shocks elevate the optionality in businesses whose demand is inelastic or trade-down resilient; aftermarket auto parts and dollar-format grocers capture increased frequency and lower-ticket replacement buying that larger-ticket discretionary categories will not. Second-order beneficiaries include regional independent repair chains, aftermarket parts wholesalers, and the last-mile distributors that can re-price faster than national OEM supply contracts, compressing margin tails for integrated manufacturers.

Key catalysts cluster by cadence: macro prints (CPI/PPI) and weekly energy/freight data will move sentiment over days-weeks, while store remodel cycles, buyback pacing and inventory normalization determine performance over quarters. Reversal vectors are short and identifiable — diplomatic de-escalation or a quick relief in input availability would remove the tailwind within weeks; conversely, a persistent real-wage squeeze coupled with aggressive central-bank hikes would flip these names from defensive to cyclical underperformers over 3–12 months.

Practical positioning should isolate execution and relative exposure: prefer long exposure to execution-led, cash-generative operators with proven buyback discipline and tight ROIC, hedge macro beta via short or underweight exposure to high-multiple discretionary content/streaming or to peers lacking the same capital-return profile. Size positions modestly (1–2% portfolio each) and harvest into macro/earnings catalysts; expect asymmetric 20–35% upside over a 3–12 month window but plan for 10–15% tactical drawdowns if input pressures ease abruptly.

Key Decisions for Investors

• Long AZO (AZO) — buy shares or buy 6–12 month calls for a 1–2% portfolio weight. Rationale: aftermarket demand durability + buyback optionality. Target +25–35% in 6–12 months; hard stop at -12–15% (or roll/downsize on earnings if comps slip).
• Long Dollar General (DG) — initiate a staged buy (25% tranches) into weakness with 9–12 month calls or shares, overweight vs general retail. Target +30% in 9–12 months as trade-down behavior persists; protective put or 12% stop to limit downside if consumer confidence collapses.
• Relative-value pair: Long AZO / Short ORLY — equal notional for 3–6 months to express preference for AZO’s capital-return profile and inventory resiliency. Unwind if spread narrows >10% or if both report margin compression; aim for 15–25% relative return.
• Macro hedge: buy 3–6 month OTM puts on AZO/DG as tail protection (financed by selling short-dated premium elsewhere) or alternatively short a small position in a high-multiple discretionary name (e.g., NFLX) to offset cyclicality risk. Use hedges to cap portfolio drawdown to ~5% if input shocks reverse quickly.