With inflation hitting an almost 40-year high of 7.5% in January, you may be looking for stocks that have pricing power.
These are companies that can raise prices without fear of losing customers as a result.
Wolfe Research compiled a list of such stocks, which includes fast-food giant McDonald’s (MCD), railroad Union Pacific (UNP) and content management company Adobe (ADBE).
“We don’t recommend extending risk until inflation shows signs of decelerating,” Wolfe wrote in a commentary cited by CNBC. “One theme that we expect to work in all scenarios is companies with strong pricing power outperforming their peers.”
Wolfe chose S&P 500 stocks that have generated gross profit margins in the top 20% of their industry over the past three years. It’s also companies that registered fourth-quarter gross margins exceeding the readings of 2019, before the pandemic began.
Other companies on the list include apparel titan Ralph Lauren (RL), alcoholic beverage maker Constellation Brands (STZ), cosmetics company Estee Lauder (EL), medical device company Dexcom (DXCM), Vertex Pharmaceuticals (VRTX), credit reporting company Equifax EFX, and semiconductor company Texas Instruments (TXN).
Vertex led the list for fourth-quarter gross margin with 88.1%. Adobe’s gross margin for the last three years was among the highest on the list at 84.9%.
As for McDonald’s, “while we expect an uneven return to normalcy due to varying paces of pandemic recovery globally, we're encouraged by management's vision for the business, which we believe should enable McDonald's to maintain its edge,” Morningstar analyst Sean Dunlop wrote in a commentary last month.
He puts fair value for the stock at $250, close to Wednesday’s close of $253.09.
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