92 stocks to buy as threat of inflation increases: UBS
- Inflation fears are back, after investors largely ignored the issue over the summer.
- Bond yields have taken off as the Federal Reserve cuts its easy money policy.
- Here are 92 stocks in 33 sectors that should perform well as inflation rises, according to UBS.
- See more stories on the Insider business page.
Inflation is back – in the minds of investors, that is. The threat of a price hike never completely dissipated, although bond buyers chose to forget about it over the summer.
But bond yields, which move inversely with prices, have fallen in recent sessions. After correcting 30% from mid-May to mid-July, the yield of the 10-year US Treasury catapulted 17% to 1.53% against 1.31% since September 20.
The reason for the summer bond sell-off was that weaker-than-expected growth was more likely than searing inflation, although that sentiment has reversed since the
last meeting of. Fed Chairman Jerome Powell has indicated that the central bank’s accommodative monetary policy, including its massive bond-buying program, will be cut later this year to prevent what he called inflation “Frustrating” to crack down.
A high inflation regime will benefit stocks of companies that can easily pass price increases on to consumers, a team of UBS strategists led by Keith Parker wrote in a September 28 memo.
Stocks with high pricing power have historically outperformed their low pricing counterparts by around 20% over 12 months after the Consumer Price Index (CPI) – a common inflation indicator – exceeded 3% on a six-month annualized basis, Parker wrote.
The upcoming third-quarter earnings season will separate the wheat from the chaff as cost pressures increase, as Parker noted analysts were increasing 12-month EBIT margin estimates disproportionately for companies with ‘strong pricing power.
“Pricing power is expected to be an even more important theme for relative returns with soaring shipping costs, rising raw materials, supply chain issues and accelerating wage growth,” Parker wrote.
The latter factor is crucial for companies, as Parker noted that a 1% wage increase cuts S&P 500 earnings by about 1.2%. Over the past three months, annualized wage growth has jumped. 35% for companies in the air freight and logistics sector and 16% for restaurants.
Transport costs are also to be watched. They typically represent 0.9% of costs for businesses, but typically range between 3% and 3.5% for retailers and businesses in the durable consumer goods and clothing sector. Large increases in shipping costs could affect profits by 4-6%, depending on the industry, Parker wrote.
“Supply chain bottlenecks, skyrocketing freight / shipping costs, rising input costs and accelerating wage growth have heightened concerns about corporate margins,” Parker wrote. “We expect the theme of pricing power to continue to evolve and emerge in the coming quarters.”
Rising inflation offers opportunities for investors
The shares sold in September as inflation fears intensified, and the price decline deepened in the last week of the month. But not all sectors will suffer in the same way.
“Pricing power may be greater in certain sectors, depending on the intrinsic nature of its pricing, and also on the extent to which certain input costs are the most important (i.e. the products of base or advertising, etc.), ”Parker wrote.
When inflation is high, measured by a 3% annualized rise in the CPI over six months, Parker noted that since 2010, stocks with high pricing power have outperformed those with low pricing power the most. awards in the following sectors: Health care, Materials, Communication services, Consumer discretionary, and Basic consumer products. Conversely, pricing power matters less to companies in the energy, utilities and financial services industries.
“Since March, when concerns about rising costs have intensified, the areas where stocks with high pricing power have performed best have been industrials and consumer discretionary,” Parker wrote. “He continued to be a lot less efficient in energy and finance.”
For a more precise look at which stocks may succeed as inflation rises, UBS analysts covering the names of 33 different sectors analyzed trends in pricing power, cost pressures and margins for highlight stocks that have the strongest and weakest pricing power relative to their peers. These names have “significantly” outperformed their peers since mid-March, Parker wrote.
Below you’ll find 92 stocks with strong pricing power across 33 sectors, along with UBS analysts’ comments on how the sector will hold up to rising inflation.