With the economy on the verge of reopening and the central bank having flooded it with an enormous amount of new money, worries about inflation are on the rise. To guard against this threat, I am looking for UK shares that will perform well in conditions of high inflation. In my opinion, these will be shares in companies that enjoy significant pricing power.
A strong brand
The first UK share on my shopping list is the iconic bootmaker, Dr Martens (LSE: DOCS). This company has the ability to raise prices during inflationary periods thanks to its strong brand and incredibly loyal customer base. Indeed, the company has been raising the prices of its boots since it first started selling them in the 1960s. A pair of 1461 shoes, for example, cost just £2 in the 60s but now sells for £159.
Dr Martens shares only recently listed on the public markets in February, meaning there is still some uncertainty surrounding the stock. The shares also trade at high price-to-earnings (P/E) ratio of 53 at the time of writing. However, with gross and operating margins at 58% and 22% respectively and revenue growing 48% last year, I still consider Dr Martens shares as a buy for my portfolio.
Strong network effects
The second UK share that fits my criteria is Auto Trader (LSE: AUTO), which owns and operates the UK’s largest online automotive marketplace. This company’s pricing power comes from its strong network effect where the value of its product increases as more people use it. This has led Auto Trader to become the dominant player in its market, with a 75% market share.
As a result of its dominant position, the company has been able to increase average revenue per retailer steadily since 2012 (with this year the exception) as well as maintain huge margins with an operating margin consistently above 65%.
Considering that the company has only grown revenues at an annual rate of 7.5% over the last five years, Auto Trader shares do seem expensive at a P/E ratio of 34. However, the company is poised for a strong recovery in 2021. Add to this the robust nature of the business and I rate this share a buy for my portfolio.
Large market share
Finally, the third UK share that I think is well positioned for higher rates of inflation is Moonpig.com (LSE: MOON). Moonpig is a leading online greeting card and gifting platform and, like Dr Martens, it only recently went public. Not only is the company benefiting from the trend towards the online purchase of greeting cards, but it also has a dominant position in both the UK and Dutch markets, with a 60% and 65% share of each market respectively.
Although Moonpig is also growing rapidly with revenues increasing 44% last year, this rate of growth will likely decline somewhat at the economy reopens and the company begins to face competition from brick and mortar sites once more. Despite this, I still think Moonpig shares are a buy for my portfolio as this slowdown is already reflected in the share price, which trades at a P/E ratio of 29 at the time of writing.
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Ollie Henry owns shares in Moonpig.com. The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.