The latest news from the Office for National Statistics (ONS) is that inflation is sticking at 4%. That’s got me thinking about FTSE 100 stocks to consider buying.
I think there are a number of UK stocks that have decent protection against rising prices. But a couple in particular stand out to me at the moment.
Inflation
Generally speaking, inflation is a nuisance for businesses. Higher costs give them a dilemma – they can either raise prices in line with the increases, or they can leave them fixed.
The trouble with raising prices is that it might harm revenues. Especially in industries where switching costs are low, there’s a danger customers will go elsewhere in search of better value.
Keeping prices fixed is more likely to retain customers and maintain revenues. But it comes at the cost of lower margins, which means a downturn in profitability.
In some cases however, switching costs for customers are high. This allows them to pass on the higher costs to customers with relatively little risk of them changing to another provider.
There are a few FTSE 100 companies that I think benefit from high switching costs. And these are the businesses I think have the best capacity to withstand the effects of inflation.
Rightmove
Top of my list is Rightmove (LSE:RMV). The business accounts for over 80% of the sector’s online search market in the UK, meaning agents don’t have much choice about advertising on its platform.
Put simply, Rightmove is where people look for houses to buy, so sellers need to be listing there. But the company’s high margins and dominant market position have been attracting attention.
US giant CoStar Group is aiming to disrupt the firm’s status as the UK leader. And the company has deep pockets, so this is a risk investors should take seriously.
Displacing Rightmove will be difficult though. Without sellers on the platform, it will be difficult to attract buyers and until buyers search elsewhere, sellers have little incentive to list elsewhere.
In my view, this puts the firm in a strong position when it comes to passing on the effects of higher costs. That’s why it’s a stock I’d consider buying for my portfolio.
Experian
Another FTSE 100 company that benefits from high switching costs is Experian (LSE:EXPN). The credit bureau operates in an industry with limited competition.
The only other major operators are Equifax and TransUnion. And lenders – mostly banks – tend to use reports from all three, rather than opting for their favourite.
The reason for this is fairly straightforward. The cost of a credit report is extremely low compared to the cost of a loan loss from an unpaid mortgage.
Furthermore, since each of the companies has its own data set and analysis, none can easily be replaced. This means switching costs for banks looking to make loans are high.
The risk with Experian is that the stock’s expensive, at a price-to-earnings (P/E) ratio of 37. But with interest rates set to fall, I’m expecting increasing profits and the company to grow into its valuation.
