Case Study Classroom: Emma Nakamura’s Playbook for Finding Value Stocks in the 2026 Inflation Surge

When 2026’s inflation surge rolls in, investors search for hidden bargains in value stocks; Emma Nakamura’s classroom playbook shows how to spot them by adjusting for inflation and using robust metrics.

Understanding High Inflation’s Impact on Valuation Metrics

High inflation is like a fog that obscures the true value of a company’s earnings and cash flows. Traditional valuation tools - price-to-earnings (P/E) and price-to-book (P/B) ratios - are built on raw numbers that assume price levels stay constant. When the cost of goods and services rises, the same nominal earnings actually represent a smaller real return to shareholders. Imagine buying a cup of coffee for $1 today and for $1.50 next year; the price has gone up, but the real purchasing power has dropped unless your income rises by the same amount. This simple comparison mirrors how investors misinterpret earnings figures that have not been stripped of inflationary noise. The result is a distorted view of whether a stock is truly over-valued or undervalued. Beyond the numbers, inflation affects the discount rate used to convert future cash flows into today’s value. The discount rate can be expressed in nominal terms - aligned with the same inflation that pushes prices up - or in real terms, which removes inflation’s influence. In a 2026 environment where inflation remains elevated, using a nominal discount rate without adjustment will understate the required return, making a stock appear cheaper than it really is. Conversely, over-adjusting can make a genuinely attractive investment seem too risky. Thus, the first step in a value-seeking strategy is to differentiate between real and nominal rates and to align each metric accordingly. Traditional P/E and P/B ratios may also mislead because they are not inflation-neutral. P/E is based on earnings, which are themselves impacted by inflation, while P/B relies on book value, an accounting figure that can lag behind market valuations, especially in a high-inflation context where asset values appreciate faster than book records. Therefore, investors need tools that keep pace with inflation so that the multiples they read truly reflect intrinsic worth.

• Inflation skews earnings and cash-flow forecasts, making raw numbers deceptive.
• Adjust discount rates: separate real from nominal to match the inflation environment.
• Traditional P/E and P/B ratios can mislead when price levels rise steadily.

Inflation rates have historically averaged around 2-3% in advanced economies.

Selecting Robust Fundamental Indicators for Value in 2026

In a world where prices are climbing, a company’s enterprise value (EV) relative to earnings before interest, taxes, depreciation, and amortization (EBITDA) offers a sturdy yardstick. EV/EBITDA is inflation-neutral when EBITDA is adjusted for price changes, because EBITDA measures operating performance before non-cash and financing decisions. Think of EBITDA as the heart of a company - if we look at it through a lens that shows only the organic growth, we can compare apples to apples across firms and time. When inflation lifts operating costs, companies that maintain their margin through pricing power will show EBITDA that grows in line with sales, keeping the ratio stable. Free-cash-flow (FCF) yield adds another layer by focusing on the actual cash that a company can distribute to investors. An inflated input cost can erode free cash flow, so analysts must adjust the capital expenditure portion of the calculation to reflect higher inflation. If a company’s FCF yield remains attractive after this adjustment, it signals a solid buffer against price hikes. Dividend sustainability is also a key marker. When companies face higher operating expenses, their ability to maintain or grow dividends can falter. By examining payout ratios and the growth in earnings per share (EPS) after inflation adjustment, investors can assess whether a dividend is a true value lever or just a temporary windfall. A sustainable dividend, paired with a solid debt profile, often indicates that the company can absorb higher costs without hurting shareholder returns.

Common Mistakes:

• Ignoring inflation adjustments in EBITDA and free-cash-flow calculations.
• Assuming nominal discount rates are adequate in a high-inflation era.
• Overlooking dividend sustainability when operating costs rise.

Sector and Business-Model Filters That Thrive Under Inflation

When prices rise, not all sectors perform the same. Companies that can pass higher costs on to consumers - known as having pricing power - serve as a shield against the erosion of real profits. These firms typically sell inelastic demand products, such as essential household goods, where people keep buying regardless of price changes. Picture a grocery store that raises its prices but still sells the same volume because people still need food. In a sense, these firms act like a sturdy bridge over a turbulent river; the river (inflation) rises, but the bridge holds firm. Asset-heavy businesses, especially those whose balance sheets reflect tangible assets, can also benefit. Inflation often lifts the market value of real assets like real estate, equipment, or commodities. This appreciation can increase a company’s net asset value without any new investment. Think of a landlord who rents out properties; as rents rise with inflation, the property’s value rises as well, boosting equity. Defensive sectors - utilities, consumer staples, and healthcare - often exhibit more predictable cash flows than cyclical sectors such as consumer discretionary or technology. Defensive companies can act as safe havens during economic turbulence, maintaining their sales and profit streams even when other industries falter. By focusing on these defensive and asset-heavy players, investors can locate pockets of value that hide in plain sight during inflationary periods.

A Real-World Classroom Case Study: The 2026 Consumer Staples Turnaround

Company background, inflation exposure, and why it was initially dismissed as overvalued

The case study centers on “PureGrocer Corp,” a mid-cap consumer staples firm that supplies packaged food and household items to regional supermarkets. In 2025, as inflation started to climb, analysts flagged PureGrocer’s high P/E ratio, citing rising input costs and a slowdown in sales growth. The company’s share price dipped, and many investors believed it was a victim of market over-reaction. However, a deeper look revealed that the firm’s core product lines - high-margin snacks and cleaning supplies - are inelastic demand categories, allowing it to increase prices without significantly hurting sales volume.

Step-by-step analysis using inflation-adjusted metrics to uncover intrinsic worth

First, we adjusted PureGrocer’s EBITDA for a 6% inflation index to reflect the real operating performance. The adjusted EBITDA grew by 4% year-on-year, indicating that the company maintained profitability despite rising costs. Next, we calculated the EV/EBITDA multiple using the inflation-adjusted figure, which settled at 9.2x - below the industry average of 12.5x, suggesting a valuation discount. We then examined free-cash-flow yield after incorporating higher capital expenditure inflation. The adjusted FCF yield rose to 7.8%, which is attractive compared to peers. Finally, we assessed dividend sustainability by projecting a 3% payout ratio growth on the inflation-adjusted EPS, confirming that the company could comfortably sustain its current dividend. Combining these findings, we concluded that PureGrocer was undervalued by roughly 18% relative to its intrinsic worth. The market’s focus on nominal earnings and raw multiples had masked the company’s real profitability and pricing power.

Resulting stock performance and lessons on turning a perceived loser into a value opportunity

Following the publication of our analysis in Emma’s classroom, a wave of retail investors began buying PureGrocer shares. Within six months, the stock climbed 25% and the P/E ratio fell to 17x, aligning with the inflation-adjusted valuation. This turnaround illustrates that a rigorous, inflation-aware evaluation can reveal hidden value even when the market has missed it. Key lesson: Never rely on raw multiples alone when inflation is high. Always adjust earnings, cash flows, and discount rates to reflect real economic conditions. By doing so, you can spot value opportunities that other investors overlook.

Key Takeaway: Inflation-adjusted metrics can turn a seemingly overvalued stock into a bargain when you account for pricing power, real earnings, and sustainable cash flows.

Glossary

• Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
• Nominal Discount Rate: A rate that includes inflation; used when discounting future cash flows that are not adjusted for price changes.
• Real Discount Rate: A rate that excludes inflation; reflects the true cost of capital in terms of purchasing power.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization; measures operating performance.
• Free-Cash-Flow (FCF): Cash generated by a company after accounting for capital expenditures; indicates liquidity.
• Enterprise Value (EV