5 Inflation-Proof Stocks to Watch in 2025
High inflation? No problem. These stocks are designed to handle it...
Hi, Investor 👋
I’m Jimmy, and welcome to another edition of our newsletter. Today, we’re covering five stocks built to withstand inflation, offering pricing power, essential products, and resilience against rising costs.
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Inflation concerns are back in focus. Talks of potential tariffs, lingering supply chain pressures, and uncertainty around the Federal Reserve’s next move have investors on edge.
With inflation proving more persistent than expected, finding ways to protect capital is becoming increasingly important.
One of the best approaches is to invest in businesses that provide essential goods or services, have strong pricing power, or are naturally insulated from rising costs.
These companies can pass on higher costs to consumers, maintain stable margins, and continue growing despite economic headwinds.
Here are five stocks that fit the bill:
5. Lockheed Martin ($LMT)
Business Model:
Lockheed Martin is a defense contractor and one of the largest suppliers of military technology to the U.S. and allied governments. The company specializes in aerospace, missile defense, cybersecurity, and space exploration, with long-term contracts that provide high revenue visibility and pricing stability.
Beyond direct government contracts, Lockheed benefits from a rising global defense budget, particularly in NATO and Indo-Pacific nations, as geopolitical tensions escalate. The F-35 fighter jet program, missile defense systems like THAAD, and hypersonic technology development ensure a steady flow of high-margin revenue, backed by government funding that is largely immune to economic cycles.
Why is Lockheed Martin interesting?
Government contracts are inflation-protected: many agreements are structured with cost adjustments.
Geopolitical tensions drive demand for fighter jets, missile defense systems, and advanced military tech.
Strong backlog of $156B ensures stable cash flows for years to come.
Valuation:
Lockheed trades at 17x forward P/E, below its historical average of 18-20x, making it relatively cheap given the increased defense spending trends. It generates $6B+ in free cash flow annually, translating into an attractive 5.5% FCF yield. With a dividend yield of 2.7% and a history of aggressive buybacks, Lockheed offers strong capital returns while maintaining stable earnings growth.
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4. Merck & Co. ($MRK)
Business Model:
Merck is a global pharmaceutical giant best known for Keytruda (oncology), Gardasil (HPV vaccine), and Januvia (diabetes treatment). The company benefits from long patent protections and a high-margin drug pipeline, making it resilient to inflationary pressures.
Keytruda alone is expected to generate $35B+ in revenue by 2028 (when the patent will expire), as it remains the leading immunotherapy for multiple cancer types. Merck’s strong R&D investments and growing pipeline in cardiovascular and rare diseases ensure long-term revenue durability even as patent cliffs approach.
Why is Merck interesting?
Healthcare is recession-proof, as patients need medications regardless of economic conditions.
Patent exclusivity protects pricing power, ensuring strong margins.
Expanding oncology portfolio supports long-term growth beyond Keytruda.
Valuation:
Merck trades at 10x forward P/E, well below the pharma sector average of 18-20x. The company generates $15B+ in free cash flow annually, supporting its 2.6% dividend yield and ongoing share buybacks. With ROIC above 20%, Merck remains one of the most capital-efficient pharma companies.
If you want to learn a bit more, I recently published this article here.
3. Diageo ($DEO)
Business Model:
Diageo is a global spirits and beverage company, owning premium alcohol brands like Johnnie Walker, Guinness, Smirnoff, and Don Julio. The company benefits from brand loyalty and premium pricing, allowing it to pass rising costs to consumers without impacting demand.
The spirits industry is highly consolidated, with Diageo maintaining strong market share in whiskey, tequila, and beer. Unlike consumer staples companies facing raw material inflation, Diageo’s pricing power allows it to maintain margins even as input costs rise. Its direct-to-consumer expansion through e-commerce and exclusive brand collaborations further strengthens profitability.
Why is Diageo interesting?
Alcohol consumption is stable and consumers rarely cut back, even in recessions.
Premium pricing power allows Diageo to maintain margins despite inflation.
Global diversification reduces risk, with strong positions in Europe, North America, and emerging markets.
Valuation:
Diageo trades at 22x forward earnings, slightly below its 10-year median of 24x. The company boasts an EBIT margin of 30%, significantly higher than peers in consumer staples, reflecting its premium pricing advantage. Its FCF yield of ~4% supports consistent dividend growth, and its net debt/EBITDA ratio of 2.5x is within a comfortable range.
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