By Michael Brush
Wednesday’s inflation report was a reminder that investors will be scrutinizing earnings reports to weed out companies whose profit margins are being eroded by rising prices.
The inflation rate clocked in at a 30-year high of 5.4% in September, up from 5.3% in the previous month, the government reported Wednesday. Food and energy prices rose the most.
That could damage your stock portfolio, but there’s a fix for that. And it’s pretty simple.
In this era of elevated inflation, favor companies that have the luxury of pricing power — but whose costs aren’t increasing. This gives them the best of both worlds.
The hard part is finding companies that fit the bill. I recently checked in with three money managers and asked them to give me — and us — their best ideas.
Here are seven companies they say check all the right boxes.
At Gabelli Funds, portfolio managers strongly favor companies with moats and durable competitive advantages. These companies also normally have pricing power. So, Gabelli is a good place to turn for names that benefit when inflation rages.
The cable and entertainment company Comcast /zigman2/quotes/209472081/composite CMCSA -1.50% is a solid example, says Chris Marangi, co-chief investment officer at Gabelli Funds. The largest cable operator in the U.S., Comcast has a moat because it is so costly to get into the cable business.
Meanwhile, Comcast still has room to raise prices and win over customers from competitors including AT&T /zigman2/quotes/203165245/composite T -1.02% and Verizon /zigman2/quotes/204980236/composite VZ +0.27% . The adoption of Zoom /zigman2/quotes/211319643/composite ZM +5.72% during the pandemic, and the popularity of gaming and video platforms like Netflix /zigman2/quotes/202353025/composite NFLX +1.12% all support ongoing demand for cable.
Comcast also has room for price increases at its Universal theme parks, and for advertising on its NBC and Telemundo broadcast networks.
“Comcast’s margins are high, and they aren’t impacted by inflation,” says Marangi.
Union Pacific /zigman2/quotes/209717171/composite UNP -2.76% connects 23 states in the western two-thirds of the country by rail, providing a critical link in the global supply chain. It serves key ports on the West Coast, the Gulf of Mexico and the Great Lakes, transporting a mix of farm products, energy, industrial goods and autos.
While it has labor and fuel costs that are going up, most of its costs are fixed. That’s because they’re historical outlays for rails, cars and rights of way. Yet the rail company can raise costs along with truckers in the current tight shipping market, notes Brian Barish, CIO at Cambiar Investors. This gives Union Pacific the best of both worlds.
“They operate with huge pricing umbrella vis-a-vis the truckers,” says Barish. “But their costs remain contained.”