Inflation is one of the key themes in my thinking about which stocks to buy for my portfolio right now.
For investors and consumers alike, inflation has one of the dominant themes of the first half of 2022. According to the latest readings, prices are around 8% higher now than they were a year ago.
It also looks as though inflation isn’t over yet. The Bank of England warned this week that the situation is likely to get worse before it gets better.
Inflation is also problem for businesses because it pushes up costs. Higher costs means lower margins, which in turn means lower earnings. There are two types of inflation-resistant businesses. The first type are able to pass the higher costs on to customers by increasing their prices.
The second type are able to nullify the impact of inflation by having low capital requirements. These businesses are protected from inflation because their costs increasing makes little difference to the overall business.
I think there are two stocks in my portfolio that especially inflation-resistant. Furthermore, I’d be happy buying either at today’s prices.
Games Workshop
My first stock to buy now is Games Workshop (LSE:GAW). The company is protected from inflation by its low capital requirements.
Games Workshop’s ongoing investment requirements are low, accounting for less than 1% of the cash it generates. Furthermore, the business produces £148m in operating income using just £96m in fixed assets.
As a result, even if inflation were to double Games Workshop’s input costs, the business would still generate substantial cash flows for its shareholders.
Games Workshop’s share price has fallen by 33% since the start of the year. At these prices, I’m happy to increase my ownership in the business.
I also think that Google (NASDAQ:GOOG) is a great stock and I’m looking at buying it now. Unlike Games Workshop, Google’s main protection against rising costs comes from its pricing power.
Google is part of a conglomerate. But the overall company is dominated by the core search engine business, which generates around 99% of total revenues.
With around 4.3bn users, Google is the largest digital advertising platform. It’s significantly bigger than its next largest competitor, Meta Platforms, which has around 3.6bn users.
This means that Google has something that its customers can’t get anywhere else. Companies that want to reach the most people have to use Google, which gives it pricing power.
As with Games Workshop, Google’s share price has been falling lately. Since the beginning of January, Google shares are down around 25%, bringing the stock to a level that I’m happy buying at for my portfolio.
Recession risk
Both stocks have the same major risk. If a recession slows down spending, then both businesses could find their profitability impacted.
In my view, though, this risk is offset by the discounted price of each company’s shares. With neither company having any substantial debt, I think that the P/E ratio is a good metric to use for valuing these businesses.
Games Workshop’s stock trades at a price-to-earnings (P/E) ratio of around 18 and Google’s share price implies a P/E ratio of around 20. With modest growth, I think that both businesses can be great investments for me over the next decade.
