With inflation at 9%, here are the stocks I’d buy now

Inflation is creating all kinds of problems in the global economy right now. But not all companies will be impacted equally, explains Edward Sheldon.

Inflation has hit 9% in the UK and the US recently and this is a problem for investors. Not only is this sky-high level of inflation reducing company profits, but it’s also impacting consumer spending, which is hitting company revenues.

However, here are companies that can offer a degree of protection against inflation. With that in mind, here are some stocks and funds I’d buy for my portfolio in the current environment.

I want pricing power

The first thing I’m looking for with inflation at such high levels is companies with pricing power. These businesses can raise their prices to offset higher costs.

Consumer goods company Reckitt is one example of such a company. Thanks to the power of its brands, it was able to raise its prices by 5.3% in Q1 2022. This helped offset higher costs.

Another example is Microsoft. In March, it increased prices for its Office 365 subscriptions. I’d be comfortable buying both stocks today.

I’m looking for high gross profit margins

When costs are rising, companies with high gross profit margins don’t see their net profits eroded as much. For example, if company A has a gross profit margin of 80% and company B has a gross profit margin of 30%, company A’s net profits are going to hold up much better if labour costs rise 10% for both businesses.

One example of a company with a very high gross profit margin is British software firm Sage. Last financial year, its gross profit margin was 93%. I think it could be a good fit for my portfolio right now.

‘Real assets’ can protect against inflation

Next, I’d consider ‘real assets’. This is an asset class that covers physical assets such as real estate, energy, and infrastructure.

Often the revenue streams of real assets are linked to inflation. For example, an infrastructure company might have contracts that are continually updated to account for inflation.

Some examples of such stocks I’d buy today include Renewables Infrastructure, which has a portfolio of clean energy assets, and Primary Health Properties, which owns healthcare properties.

Payments companies benefit from rising prices

Payments companies such as Mastercard and Visa also look attractive to me with inflation at such high levels. These businesses take a cut of every transaction they process, so higher prices benefit them. I’d steer clear of payments companies that have credit risk though, such as Buy Now Pay Later businesses.

Automation can help beat inflation

Finally, it’s worth pointing out that one way companies can beat inflation is to digitalise and automate processes. This can potentially save them a fortune.

There are a lot of digital transformation stocks that I’d consider for my portfolio today. However, investing in this space is a little tricky right now because many businesses are experiencing supply chain issues.

So what I’d do is invest in funds such as the L&G ROBO Global Robotics and Automation UCITS ETF and the Polar Capital Automation and Artificial Intelligence Fund. These would provide me with diversified exposure to the automation theme.

Of course, none of these stocks and funds will guarantee me protection against inflation. All the companies have their own risks. However, all things considered, I think they could play a valuable role in my portfolio right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Edward Sheldon has positions in Mastercard, Microsoft, Reckitt plc, Sage Group, and Visa. The Motley Fool UK has recommended Mastercard, Microsoft, Primary Health Properties, Reckitt plc, and Sage Group. 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.

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