Stocks tumbled on February 13 as hotter-than-expected inflation data ignited a surge in Treasury yields. The Dow fell 1.35%, and the S&P 500 slid 1.37%, while the tech-heavy Nasdaq sank 1.8%.
January’s CPI rose 0.3% month over month and 3.1% year over year (YOY) exceeding economist estimates. With inflation remaining stubbornly high, fears mounted that the Fed may not cut rates in 2024 as anticipated.
As inflationary pressures linger, prudent investors seek refuge in resilient inflation stocks. This article highlights three inflation-resistant picks chosen for their robust economic moats and capital efficiency – key traits Warren Buffett identified for prospering during inflationary periods.
When inflation spikes, Buffett advises buying businesses requiring little ongoing capital investment. At a 2015 Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) shareholder meeting, he stated, “The best businesses during inflation are the ones you buy once without having to keep making capital investments subsequently.”
In a 1981 letter, Buffett explained ideal inflation stocks in the following way: “(1) an ability to easily raise prices without losing market share or volume, and (2) an ability to accommodate large business growth with minimal capital investment.” Boasting wide moats and stellar capital stewardship, the selected stocks exhibit these traits. While inflation fuels uncertainty, these inflation stocks offer stability.
Monster Beverage Corp (MNST)
Grocery store shelf with 16 ounce cans of Monster brand energy drinks.
Source: Sheila Fitzgerald / Shutterstock.com
Monster Beverage (NASDAQ:MNST) is one of the top inflation stocks, with its ability to easily raise prices and require little capital expenditure to drive growth. The energy drink titan has increased net sales every quarter for over 30 years straight. For example, in Q3 2023, net sales rose 14.3% to $1.86 billion. On a constant currency basis, net sales climbed 16.1%.
Monster boasts margins that demonstrate pricing power and efficiency. Gross margin improved to 53% in Q3 2023, from 51.3% a year ago. Additionally, operating income increased 22.2% YOY to $510.5 million, resulting in a sturdy operating margin of 27.5%. Over the last 5 years, Monster maintained a median return on equity of 28.8% and a return on invested capital of 26.2%.
With over $1.5 billion in cash and only $350 million in debt, Monster has the balance sheet flexibility to withstand inflationary pressures. Furthermore, the company generates sizeable free cash flow, reaching $1.2 billion in the last 12 months. Monster requires little capital investment, expecting 2023 capital expenditures of just $225 million. Backed by strong brands, pricing power, high margins, and efficient growth, Monster Beverage is one of the best inflation stocks.
Applied Materials (AMAT)
Applied Materials (AMAT) company sign outside office
Source: michelmond / Shutterstock.com
Applied Materials (NASDAQ:AMAT) is well-positioned among inflation stocks due to its strong financial performance and pivotal role in the semiconductor industry.
In Q1 2024, Applied Materials generated revenues of $6.71 billion. Furthermore, its gross margin expanded 1.1 points YOY to 47.8% on a GAAP basis. Additionally, the company’s operating margin held steady at 29.5% on a non-GAAP basis. Net income grew 18% to $2.0 billion, while non-GAAP EPS increased 5% to $2.13.
Crucially, AMAT is a global leader in semiconductor manufacturing equipment. Even more importantly, the demand for chips that power AI, data centers, 5G, and IoT equipment is surging. As a result, spending is projected to reach over $100 billion by 2025. With a dominant market share, Applied Materials stands to benefit tremendously from this secular growth trend. A clear indicator of this fact is that the company’s order backlog has swelled to a record $19 billion.
Recently, the company launched a breakthrough digital lithography technology which enables heterogeneous chiplet integration. This meets the advanced packaging needs of the AI era. The innovation positions the company to capitalize on the industry’s transition towards chiplets and accelerated compute architectures. Applied Materials’ strong margins, earnings growth, industry leadership, robust demand outlook, and cutting-edge technology make it an attractive inflation stock. The company is poised to generate steady growth as chipmakers raise capacity to meet swelling demand in the AI era. Investors seeking excellent inflation stocks would do well to consider Applied Materials.
Snap-on (SNA)
A set of socket wrenches in close-up
Source: RMC42/ShutterStock.com
Snap-on (NYSE:SNA) is poised to be an inflation-proof stock based on its steady revenue growth, healthy margins, consistent free cash flow generation, and 85 years of uninterrupted dividend payouts. The tool and diagnostic equipment manufacturer operates in resilient end markets like automotive repair that see steady demand even during economic downturns.
Snap-on reported full-year 2023 net sales growth of 5.3% to over $4.7 billion, with organic sales up 5.6%. Net earnings rose 11.5% to $1.01 billion. The company has delivered steady sales gains in recent years through innovation and expanding its professional customer base beyond automotive repair into critical industries like aerospace.
Also, re-shoring trends benefit Snap-on as manufacturing returns to the U.S. The company can react faster to demand shifts with local production. Its U.S. manufacturing jobs help supply the automotive repair and critical industries segments. Operating margins have improved over the past decade to 21.6% in Q4 2023, driven by ongoing efficiency initiatives. FCF consistently ranges from $300-400 million after dividends, enabling investments in growth while maintaining negligible debt levels. SNA has paid dividends since 1939 through wars, recessions, and now high inflation. Its defensive traits make Snap-on an excellent option for investors looking for inflation stocks.
On the date of publication, Andrea van Schalkwyk held a long position in BRK-B. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Andrea van Schalkwyk is a value investor who adheres to the principles of the renowned Warren Buffett and his mentor Benjamin Graham. He holds a Master of Engineering (MEng) from the University of Padua and an Executive MBA from the CUOA Business School.
