Inflation has been soaring in recent months, hitting around 7% in the US in December. The UK is also seeing high rates. This has become a key factor for me in deciding which stocks to buy. It is also the reason why multiple growth stocks have crashed recently. But there are still several companies that should be able to cope well with inflationary pressures and may even benefit. Here are my top two.
Rising price of commodities
Mining stocks are known to do fairly well in times of high inflation, due to the rising price of commodities. Anglo American (LSE: AAL) is my personal favourite, due to its diversified source of revenues. This includes operations in iron ore, diamonds, rhodium, and copper. The soaring price of many of these commodities also meant that in the first half of 2021, revenues were able to rise 114% year-on-year to $2.8bn. Underlying EBITDA also reached $12.1bn, over a 250% rise.
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Such excellent results have led to very generous shareholder returns, including a special dividend and a large share buyback programme. For the next year, it has a prospective yield of around 6%, far higher than other FTSE 100 stocks.
Unfortunately, the price of some of these commodities has fallen back from its highs last year, despite the effects of rising inflation. This includes iron ore, which fell due to reduced Chinese demand. There is a risk it could drop further. Even so, inflation seems to be here to stay, and for Anglo’s overall operations, this should have a positive effect. Therefore, I may add this stock to my portfolio for some protection against inflation.
A luxurious FTSE 100 stock
While inflation does not benefit Burberry (LSE: BRBY) in the same way as it does Anglo, I still believe that it will be able to cope well. Indeed, as a luxury fashion house, its customers are affluent and less focused on budget-cutting. This means that rising costs should not affect them in the same way as the general population. This differentiates Burberry from other FTSE 100 stocks.
There are also promising signs for the company. Indeed, in the first half of FY22, both revenues and adjusted profits were slightly higher than pre-Covid levels. This has allowed the fashion house to raise the interim dividend slightly and launch a £150m share buyback programme. The recent results also give the shares a price-to-earnings ratio of around 24, lower than rivals such as Kering, which owns brands like Gucci and Saint Laurent, and LVMH, the owner of both Louis Vuitton and Dior. This suggests Burberry may be an extremely solid choice in luxury fashion.
I feel optimistic about the appointment of Jonathan Akeroyd as CEO, who will begin in April. With experience at Versace and Alexander McQueen, Akeroyd seems well equipped for the role. Hopefully, new management will enable Burberry to increase profits further.
I am very tempted to add some Burberry shares to my portfolio. This is despite the risks that Chinese demand may slow due to potential taxes on the rich as a method of redistributing wealth. Such a move would adversely affect Burberry, as China generates a large amount of demand for luxury fashion. Even so, I feel the positives outweigh these risks, and Burberry remains a top pick, especially as it’s more resistant to inflation than some other FTSE 100 stocks.
