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Inflation is marking the evolution of financial assets around the world. Central banks have rushed to raise interest rates and tighten their monetary policies to try to clamp down on prices.
That movement has caused some strong stock market corrections. With energy and commodity prices rising sharply, managers already expect downward revisions to corporate margins and earnings prospects in the coming years.
In this environment, what kind of companies are best prepared to face these price increases? What business profiles will be able to deal with this situation?
The managers point out that the most important thing is going to be the ability of companies to transfer cost increases to their clients. In general, the leaders of each market are better positioned to do so, especially when they operate in markets with few competitors.
In addition, some sectors, such as luxury, are better prepared, since the cost of the raw material is residual within their accounts.
1. LVMH: luxury brands are not afraid of inflation
In the world of luxury, the cost of the raw material has a residual importance. The important thing is the intangibles, the brand, the reputation, the exclusivity. When the cost of production materials represents less than 10% of the product’s sale price, as is the case with colognes or haute couture, the drums of inflation are of little concern.
The French conglomerate LVMH, owner of fashion brands such as Louis Vuitton, Givenchy, Kenzo, Marc Jacobs, knows this well; champagne, like Moët Chandon; of jewels such as Tiffany & Co, Bvlgari or Hublot… In total, more than 76 brands of luxury firms renowned throughout the world.
For the Buy & Hold investment fund manager, this is one of the main positions in its portfolios (both funds and pension plans), precisely because of its great pricing capacity, as it is the absolute leader in many of the the markets in which it operates.
The shares present a good entry point, having lost 17% of their value in 2022. Some analysts find it even more attractive to buy shares in Christian Dior, which controls 42% of LVMH’s assets and trades at an even deeper discount.
2. NKT: leader in a key element for wind energy
The fund manager of A&G Banca Privada, Andrés Allende, manages the DIP Value Catalyst Equity Fund vehicle, which has registered a return of 14% in 2022 despite the difficulty of this year. One of his most personal bets is the Danish company NKT, specialized in the manufacture of cables for power transmission. “We believe that the demand for this type of component is going to skyrocket due to the installation of many electric farms or wind turbines in the sea,” explains the manager.
The great advantage of NKT is that it is highly specialized in the highest quality cables, which are essential for optimizing the transport of energy when the point of generation is relatively far from the place where it is consumed or stored.
“This is a small sector, and the large electricity companies that install new solar power plants don’t mind paying a little more to have the best wiring,” says Allende.
The shares of this company have appreciated almost 20% this year, but could rise more thanks to the ambitious plans to promote renewable energies that have been launched both in the United States and in the European Union. It is also a specialist in fiber optic cables.
3. ASML: the advantage of an oligopolistic position
The past year has highlighted how heavily dependent the world is on the supply of microchips. The bottlenecks put car manufacturers or telephony in check. In fact, the EU has already launched a specific program to increase the local production of chips and not depend so much on other markets.
The ASML company does not manufacture semiconductors but the machines specialized in priming the chips. And it is a sector so specific that in practice it functions as an oligopoly. David Ardura, director of investments at Finaccess Value, explains that “to build a business that can compete with ASML, you would need at least ten years, which gives an idea of the high barriers to entry with which this company operates.” Thus, it is a strategic sector, with forecasts of strong demand for chips (which are increasingly used for more components, from virtual glasses to household appliances), and a key supplier that operates in an oligopoly regime and has a strong capacity pricing.
In addition, the shares of the Dutch company are trading very cheap, 27% below the price at the beginning of the year. “It’s a good entry point for a company like this,” says Ardura.
4. Porsche: high-end cars and electric positioning
The car manufacturer Porsche is one of the oldest and most successful investment theses of Iván Martín, president and fund manager of Magallanes Value Investors. The German group, in addition to owning the iconic luxury car brand, also owns 31% of Volkswagen (which controls Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Ducati, Scania and MAN).
The strong presence of these companies makes them better prepared than other competitors to be able to transfer cost increases to the final consumer. Especially in the case of high-end vehicles.
On the threat posed by the car manufacturer Tesla, Martín explains that the American manufacturer has been losing market share in electric cars in Europe. “It has strong high-end competitors, such as the Audi e-Tron or the Porsche Taycan.”
Porsche shares have depreciated 22% in the last 12 months, which may represent a good buying opportunity.
In addition, the company recently acquired one of the leading electric bicycle manufacturing companies to further diversify its business towards sustainable mobility.
5. Tesla: vertical integration to control expenses
The electric car manufacturer Tesla, controlled by billionaire Elon Musk, is one of the companies that has suffered the greatest stock market correction this year, almost 38% down. Investors doubt long-term sales projections. However, there are several funds that continue to trust the company. This is the case of Emérito Quintana, adviser to the Numantia Patrimonio funds, from Renta 4. This specialist highlights several strengths of the car manufacturer: “it has a vertical integration of the production chain, so it does not have a strong dependence on suppliers, as it happens to other competitors; In addition, it is the most prominent company in the development of autonomous cars, because it has been collecting and analyzing driving data for years”.
Regarding prices, the company has been in the high segment, which has not prevented the waiting lists to receive a new Tesla have not stopped growing in recent years. There is so much demand that some even speculate on the collection point they have and sell it to others who are more impatient.
Quintana invested for the first time in 2018, when the stock was worth $60 and they were already saying it was a bubble. They are now trading at $740.
6. Corticeira: sustainable company with barriers to entry
Corticeira Amorim is one of the leading companies in Portugal thanks to the cork market, especially for wine bottle stoppers. The country produces 50% of the world’s cork (extracted from the bark of cork oaks) and Amorim is the undisputed leader in the sector. Only last year they registered sales of 830 million euros, 13% more than the previous year. In addition to corks for wines, champagnes and spirits, they also produce cork flooring, which is increasingly in demand.
Many Spanish and Portuguese funds are increasing their exposure to Corticeira Amorim, as it is a company with strong pricing power and low exposure to price increases (the company controls cork oak exploitation).
Metavalor managers (five Morningstar stars) have had significant positions in Corticeira Amorim. Also those of Caja de Ingenieros.
In addition to a dominant market position, an integration of its production chain and sales capacity throughout the world, Corticeira Amorim is also being closely followed by investors for having an environmental protection profile, because its business promotes the conservation of cork oak meadows, a key ecosystem to preserve biodiversity.
7. Fresenius: the strength of the benchmark for hospital management
The health services sector is one of the preferred by fund managers to face these times of inflation and stock market volatility. Health spending is very inelastic, that is, people continue to maintain a similar level of demand even if there are price increases.
One of the favorite companies among investors is Fresnius, the leading hospital group in Germany, which manages 110 centers (30,000 beds) and last year recorded revenues of more than 37,000 million euros. In addition, it has a subsidiary specializing in dialysis services and another pharmaceutical (with drugs to fight cancer).
CaixaBank Bolsa Gestión Europa, one of the reference funds for European equities, maintains a high exposure to this company, considered a defensive cut-off value, with a very stable level of income and little affected by price increases.
One of the latest firms to become a Fresenius shareholder has been Cobas Asset Management (chaired by Francisco García Paramés), especially valuing that it is “one of the European leaders in health thanks to hospital management and dialysis”.
8. Alphabet: the great colossus of online advertising
The technology sector is the one that has suffered the most on the stock market since the United States began to raise interest rates. The valuation of these companies is highly dependent on future earnings prospects, and how they are computed at current prices. The higher the interest rates, the higher the discount rate applied to future years’ cash flows, making companies worth less.
David Ardura, director of investments at Finaccess Value, considers that this factor has caused the market to indiscriminately exit technology stocks, “equating companies that are losing with others that have an enormous capacity to generate recurring income and that have huge barriers to entry in their businesses, as is the case with Alphabet [la matriz de Google y Youtube]”,.
Ardura recalls that every day hundreds of millions of people consult the Google search engine, which means that Alphabet accounts for “close to 80% of online advertising worldwide.”
This strong dominant position and its limited exposure to cost increases mean that Alphabet’s margins are hardly being hurt by price increases.