Buy these stocks with pricing power as inflation heats up, UBS says
As multiple signs of inflation heat up, UBS recommends investors look at shares of companies with the ability to pass those costs increases onto consumers. "The current backdrop of rising inflation should help companies with strong pricing power outperform. This relative strength does not appear to be priced in," Keith Parker, head of UBS equity strategy, told clients in a note. Amid a rise in commodity prices to multi-year highs, like corn and copper , some companies are indicating that they are going to increase product prices. The businesses that are able to raise prices without denting sales should see an increase to their margins over time, making them attractive investments, according to Parker. UBS noted that some of these companies have underperformed in recent months. Since October 2020, strong pricing power stocks have underperformed weak ones by 10%, the firm said. UBS developed a framework for scoring corporate pricing agility, which considers pricing power, margin momentum and input cost exposure. For pricing power, UBS quantified the extent to which a company can raise prices over and above costs. For margin momentum, UBS tracked corporate pricing trends using its proprietary pricing mapping. "Firms with greater analyst margin revisions and sales growth acceleration with lower margin expectations also score better," the firm said. For input cost exposure, UBS searched for companies with negative sentiment around commodity and transport costs on earnings calls. UBS gave each company in the S & P 500 a score based on pricing power and margin momentum. Then, the firm ranked each stock against its sector peers. Take a look at UBS' list of large-cap stocks with strong pricing power. Expedia Group ranks the highest in the consumer discretionary sector. Many on Wall Street expect consumer discretionary spending to shift to travel and entertainment, from consumer goods, as the economy continues to reopen. This trend should benefit Norwegian Cruise Line as well, UBS says. Activision Blizzard , Philip Morris International , Estee Lauder and EOG Resources also made UBS's list of stocks with strong pricing power. E-broker Charles Schwab appeared on UBS' list. The online broker reported better-than-expected earnings earlier this month, which also showed Schwab added a record 3.2 million new clients in the first quarter of 2021 . That compares with about 2.4 million new accounts added in all of 2020. Small-cap peer Interactive Brokers appeared on UBS' small-cap list of stocks with strong pricing power. Visa is another name the should hold up in the face of inflation. JPMorgan reiterated its buy rating on the payments giant on Monday and updated its earnings estimates based on higher volumes trends. In the real estate sector, UBS determined Vornado Realty Trust as the most pricing power in its sector. The shopping center and mall operator has a long road back to rent growth following the pandemic, according to Bank of America; however, first quarter leasing data showed signs of improvement. Ecolab , Duke Energy and NiSource also appeared on the large-cap pricing power list. MarketAxess , Jazz Pharmaceuticals and Equifax also earned spots on the list. Some of the other small-cap names that appeared on UBS's strong pricing power list are Callaway Golf , Ethan Allen , Six Flags Entertainment and Tupperware Brands . — with reporting from CNBC's Michael Bloom.

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