Even though inflation has been nearly non-existent, it’s important for investors to understand the potential impact it could have on an equity portfolio. In a recent article for TheStreet, Validea CEO John Reese refers to Warren Buffett’s position that, while inflation hurts both stocks and bonds, “stocks are probably still the best of all the poor alternatives in an era of inflation — at least they are if you buy in at appropriate prices.” Reese explains that an equity investor’s best defense against an inflationary environment is to hold stocks of businesses that have substantial pricing power–the ability to maintain or raise prices in good times and bad.
He offers the following three stock picks that possess pricing power and earn high marks for strong business fundamentals:
Apple (AAPL) This tech giant designs, manufactures and markets a host of communication and media devices including Apple TV, iPad, iPod and Mac. The company earns a perfect score under the Buffett model due to its earnings predictability, competitive advantage and free cash flow-per share.
Monster Beverage (MNST), through its subsidiaries, markets and distributes energy drinks under the widely recognizable Monster brand. The company earns high marks for its debt-free balance sheet, long-term average return-on-total capital and consistent growth in earnings-per-share.
Sherwin Williams (SHW) is a household name in coatings, paint and related products, and scores well based on its modest debt level and long term growth in earnings-per-share. A decrease in shares outstanding over the past five years reflects efforts by management to increase shareholder value.