Dec 22nd

Portfolio Management: Smart Stocks to Own When Inflation is High

The best investments to make or have right now

The question on everyone’s minds is “what kind of stocks do you want to own when inflation is high?” To ask it a different way: what is the best place to invest money right now? 

“The short answer is that you want to own stocks with the pricing power to preserve and grow their profits, but finding these investments is easier said than done,” says Sam Kendrick, portfolio manager and vice president at Whittier Trust, who oversees investment and wealth management solutions for clients. 

Here, Kendrick outlines three key types of equity that are the best investments during times of high inflation.

Budget-Friendly Essentials

When inflation hits, everything typically costs more. Therefore, the portion of businesses’ and consumers’ budgets that gets allocated to the essentials, or non-discretionary purchases, such as gas, food and rent, goes up. Both types of entities have less money left over to spend on things they might want rather than need. Non-discretionary businesses often have some degree of pricing power, and they congregate in certain sectors, such as healthcare, utilities and consumer staples.

“Another dynamic that takes place during inflationary periods is trade-down demand. Across all categories—discretionary and non-discretionary—consumers and businesses seek out the cheapest version of a good or service to save money. Low-cost providers also have an easier time raising prices, to a point, given that they are starting at a low base,” says Kendrick. All else being equal, high-end clothes from Nordstrom won’t see as much demand as budget-friendly clothes from an off-price retailer like T.J. Maxx. 

Higher-Margin Companies

“High-margin companies are attractive in any environment, but margins take on even greater importance when inflation is elevated,” Kendrick says. Invest in higher-margin companies because the percentage of revenue that goes to covering cost is lower. This means that when inflation hits costs, these companies can maintain their profit levels with fewer price increases, which equates to maintaining their stock prices. 

“Your profits are less likely to drop,” Kendrick says. “This is one reason why investors typically like real estate during periods of high inflation. Margins are typically high, so cost inflation has less impact and rent increases fall more directly to the bottom line.”

Asset-Light Business Models

Other companies that are beneficial to invest in during inflation are those with asset-light business models, meaning they have to spend less to grow the business. 

“This matters for inflation because the cost of assets goes up. The cost to build a factory, drill an oil well or hire more people is all going to increase, making it more difficult to grow assets and therefore revenue.”

Kendrick notes that software and technology are great asset-light categories. These companies can continue to invest and grow profitably, even as costs rise. “In the end, growth is a great inflation hedge,” Kendrick says.  

A Company That Checks All the Boxes

Visa is an example of a company that has all three of the above things going for it. It has 65% operating margins, which means $65 out of every $100 of revenue is profit. Because Visa has an existing global network and people are using credit cards more each year, it does not have to invest heavily to grow its revenues. And when it comes to discretionary vs. non-discretionary spending, it is agnostic—any dollar you spend on a Visa card is essentially the same to Visa. So if you’re spending more during times of inflation (even if you’re getting less), that benefits Visa—and its investors. 

“Visa isn’t likely to just maintain its profits during periods of high inflation but grow them in real terms as well,” Kendrick says. 

Whittier Trust portfolio managers look at the macro-economic picture and choose the best investments for their clients to own to compound their wealth after taxes. “In this environment, where inflation is having a major impact on markets, we work to guide and position clients well so that they grow their spending power and their assets over the long term,” says Kendrick.

empty image