Inflation has gone from an annoying “i-word” to a full-blown curse word since the Russian invasion of Ukraine. Prices of everything from oil and gasoline to wheat and corn have skyrocketed with sanctions and boycotts escalating an already volatile pricing environment.
This in turn has sent shares of companies that make money from higher commodity prices even higher—and those for whom commodities are key inputs lower. For example, oil producers are hot commodities while airliners are being grounded.
With the exception of pure commodity-linked businesses, there isn’t a company in the world that is fully immune to the effects of high inflation. Heck, even energy and materials companies face higher input, equipment, and labor expenses during periods of widespread inflation.
The reality is some companies are better equipped to handle inflation. This can be because they sell inelastic goods or have premium brands that consumers don’t think twice about paying more for.
Here are three names that have proven to be resilient during inflationary periods and are likely to do the same during the current crisis.
Is Coca-Cola Stock a Good Inflation Play?
Oil is one of the most popular inflation hedges but the liquids made by The Coca-Cola Co. (NYSE: KO) may be just as effective. That’s because beverage brands like Coke, Sprite, MinuteMaid, and even Powerade are nationally known and a household item for the wealthy, the poor, and everyone in between.
When inflation rears its ugly head Coca Cola simply raises its prices slightly ahead of production costs to maintain a healthy margin. The result is rather consistent sales and profit growth throughout periods of recession and economic growth alike. It is a formula that has served Coke stockholders quite well over the years, including legendary investor Warren Buffet.
With an annualized return of 8.7% over the last 15 years, Coca Cola shares don’t typically outperform the broader market when times are good. What they do do, however, is offer protection against the bad times, including when geopolitical and inflation pressures are high.
Steady consumer demand and an ability to stay ahead of inflation should keep Coke bubbling along in this environment. Its shareholders can crack open a cold one knowing the dividends and steady long-term gains are bound to keep pouring in.
How is Costco Handling Inflation?
Costco Wholesale Corp. (NASDAQ: COST) has performed well during the economic recovery despite mounting pressure to hike prices at the expense of its low-cost image. After surging 51% in 2021, the stock has slipped 7% year-to-date but is outperforming the broader market.
The warehouse retailer benefits from inflation in two ways. First, when consumers start seeing higher prices at groceries and other brick and mortar stores, they become more keen on finding a good deal. That often leads to higher demand for buying in bulk, especially during times of stockpiling such as we’ve seen since the start of the pandemic.
Second, even though Costco thrives on its ultra low price tags, it does have the ability to raise prices. Shoppers know they are already getting a great deal and therefore either don’t notice or don’t care if a family pack of cereal or chicken costs a bit more.
Management has thus far taken a cautious approach to price increases choosing to trail the pace of inflation. This has come at the expense of near-term profitability but at the benefit of maintaining its customer value proposition. It is a sacrifice that should ultimately lead to increased memberships and long-term loyalty, a priceless asset in retail.
Costco’s increasing focus on higher-margin, private label products also serves as an inflation-proof vest. Kirkland Signature and other private brands accounted for roughly 25% of overall sales last year and are expected to become a bigger part of the business going forward.
Is Nike an Inflation Proof Stock?
NIKE, Inc. (NYSE: NKE) falls under the category of inflation-proof because it has a premium brand that fashion-minded consumers around the globe are willing to spend more on. Whether it be sneakers or apparel, the Nike swoosh remains a sought after status symbol despite the onslaught of competition from Under Armour and plenty of knock-off brands.
People also pay up for Nike products because they know they will last a long time if not a lifetime. When you offer high quality apparel that is in constant demand, that comes with the perk of being able to raise prices to offset inflation.
Nike has successfully managed inflationary periods in the past and the current environment is no exception. Look no further than the company’s fourth-quarter gross margin, which rose an impressive 2.8% to 45.9%. Even significantly higher transportation costs weren’t enough to put a meaningful dent in profitability.
A big part of Nike’s ability to perform well during these unusual economic times is its emerging digital business. Amid a push to form a more direct connection with its massive loyal following, investments in Nike Direct are paying off. Revamped websites and apps as well as a more pronounced social media presence are resonating well with its audience and making e-commerce a bigger part of the business mix.
A premium brand with pricing power is a potent combination in an inflationary setting, and Nike has it. And with the stock trading well off its November 2021 record peak, it may be time for prospective long-term investors to ‘Just Do It
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