Welcome Back, Stagflation!

The recent PPI data that showed a 3.2% (highest in 35 years) monthly increase in wholesale prices, and a 0.8% rise in the CPI, brings about a conundrum reminiscent of the so called double dip recession we saw in the early 1980s. Eerie similarities from that time period are popping up every day: record oil prices, a weak consumer, and a limping housing market, all lead to a higher likelihood of recession in 2008 than most economists are letting on – note the terrible accuracy of recession predictions in the past.

The collective environment seems to be inviting back stagflation, or the rising of inflation sans economic growth. GDP growth is already creeping down, and with new accelerated inflation readings coming out, Ben Bernanke and the Fed are likely to be soon waving helplessly as the economy sinks.

A push into counter-cyclical stocks has already begun; since September, notable counter-cyclicals such as Johnson-Johnson (JNJ) (9.6%), Budweiser (10.4%), and Yum! Brands (YUM) (21.8%) have all risen sharply. However, that doesn't mean there aren't a few bargain stocks out there that could prove to be profitable over a slower period of growth.

Altria (MO), a supplier of a cigarette and tobacco products, is another large cap counter-cyclical play and has room on the upside as it's trading at just 15x TTM earnings – a 26% net margin will magnify earnings against other cyclical plays.

A search for stability might also lead you to 3M Corp. (MMM), which produces office supply products among a number of other diversified segments like health care and electronics. The company is looking for EPS growth of 10% in 2008 (which could quite possibly be hard to come by), has an ROE of 40% and claims an 18% profit margin, none of which appears to be reflected in 14x earnings multiple.

BJ'S Wholesale (BJ) could also prove to be safe as consumers fight rising energy prices by buying bulk food and personal products. The company observed same store growth of 7.7% in November, 25% year over year EPS growth, and although trading at an expensive 24x TTM, the future growth considering the environment might be worthy of the price.

Cadbury Schweppes Public Limited Co. (CSG) makes popular beverage products under the brand names Schweppes, Mott's, Dr Pepper, 7UP, Hawaiian Punch, and Snapple. If you missed the moves in Pepsi Co. (PEP) and Coke (KO), there is still time on this stock. Currently trading at 24x TTM, the company pays an annual dividend of $1.18, has a 15% net margin and reported EBITDA of $2.52 billion in 2006. It could be worth paying a 24x multiple here, as well.

Smucker J M Co. (SJM) primarily sells peanut butter, baking ingredients, fruit beverages, condiments and fruit spreads (Smuckers). Staple brands will ensure stability and a 15% net margin should also solidify a continued return to shareholders. Trading at just 16x TTM earnings, the company looks like a sound play.

Companies like these may be overlooked (and cheap today), but with an economic slow down around the corner, high single digit EPS growth will be a desired commodity.

Disclosure: none