2 Stocks That Look at Risk if Inflation Rises

Key Concepts

• Economic Moat: A term used by Morningstar to describe a company's ability to maintain competitive advantages over its rivals to protect its long-term profits and market share.
• Fair Value Estimate: The intrinsic value of a stock as calculated by Morningstar analysts, representing what they believe the company is worth based on future cash flows.
• Inflationary Risk: The potential for rising prices to reduce consumer purchasing power, specifically impacting discretionary spending on non-essential goods.
• Off-price Retail: A business model that sells brand-name goods at prices lower than traditional retail, often through a "treasure hunt" shopping experience.

Analysis of Overvalued Stocks in an Inflationary Environment

Susan Jabinski, co-host of the Morning Filter podcast, highlights two specific stocks—Tapestry and TJX Companies—that are currently trading significantly above Morningstar’s fair value estimates. These companies are identified as high-risk investments should inflation spike, as their business models rely heavily on consumer discretionary spending.

1. Tapestry (Parent of Coach and Kate Spade)

• Business Profile: Tapestry operates in the luxury accessories and fashion sector. Morningstar assigns the company a narrow economic moat, primarily attributed to the brand strength of Coach.
• Market Performance: Despite a challenging environment for luxury goods, Tapestry has successfully utilized marketing and merchandising strategies to capture a younger demographic.
• Investment Risk: The primary concern is the sensitivity of luxury goods to inflation. As inflation rises, consumers typically prioritize essential items, leading to a reduction in spending on non-essential luxury accessories like handbags.
• Valuation: The stock is currently trading well above Morningstar’s $76 fair value estimate, suggesting it is overvalued.

2. TJX Companies (TJ Maxx, Marshalls, HomeGoods)

• Business Profile: As the world’s largest off-price apparel and home fashions retailer, TJX possesses a wide economic moat. This is supported by a global vendor network, rapid inventory turnover, and a low-cost store model.
• Operational Strategy: The company creates a "treasure hunt" experience that appeals to middle- to upper-income consumers.
• Investment Risk: While the off-price model is generally resilient, the stock is currently considered overpriced. If inflation intensifies and causes a broader pullback in non-essential consumer spending, the share price is vulnerable to a significant decline.
• Valuation: Morningstar estimates the fair value of the stock at $100 per share.

Synthesis and Conclusion

The core argument presented is that even companies with strong competitive advantages (economic moats) are susceptible to market corrections if their stock prices exceed their intrinsic value and if they operate in sectors highly sensitive to inflationary pressures.

• Key Takeaway: Investors are cautioned against holding stocks that are trading at a premium when macroeconomic conditions—specifically inflation—threaten to dampen consumer demand for non-essential goods. Both Tapestry and TJX Companies, despite their brand strength and operational efficiencies, are flagged as stocks to potentially sell or avoid due to their current overvaluation relative to Morningstar’s fair value estimates.