High inflation rates in the nation have become a serious problem for Wall Street.
But fortunately for normal investors, Berkshire Hathaway CEO Warren Buffett has the experience to navigate such an environment.
Buffett managed a portfolio through times of inflation in the 1970s and has lots of advice for what to buy and hold when prices spike.
In a 1981 message to Berkshire shareholders, Buffett said there were two characteristics that made a business well adapted to any inflationary environment: 1) the ability to increase prices, and 2) the ability to take on greater business without needing to spend too much to do it.
In other words, aim to invest in asset-light companies with pricing power. Let’s look at two companies that fit this description.
Nike
Nike is a global powerhouse in the footwear market that commands a high loyalty among its customers.
Customers are willing to give top dollar for signature gear linked with high-profile athletes such as Michael Jordan and LeBron James.
Despite the pressures of inflation, Nike continues to grow its gross margins and post great returns on equity higher than 30%.
The company is also captured the full price of its products during an increasingly digital, direct-to-consumer model.
Management thinks digital sales might continue to expand from 20% of revenue currently to around 40% of the business by the year 2025. And price increases might kick in as early as 2022.
Apple
Global demand for Apple’s top hardware is expanding, as are adoption rates for its top-margin Apple services.
Strong brand identity, user friendliness, and a large range of fully integrated products are great attributes that are not going away any time soon.
Customers just cannot afford to live outside Apple’s ecosystem. That gives the tech company more freedom to play with their pricing as inflation goes up.
The company’s newest M1 chips, which has replaced Intel’s CPUs almost every Mac, underscores its commitment to new innovation.
Apple’s ability to pass on rising costs to a global customer base without significant losses of sales is undeniable.
Warren Buffett has allowed Apple to go to 40% of Berkshire Hathaway’s portfolio for a good reason: The business just keeps expanding profits through every economic cycle.
Apple is higher by around 13% ytd and trades at almost $150 a share.
Author: Blake Ambrose
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