Inflation Is Great News For These Stocks
Last week there was some big inflation news… and it wasn’t good.
Inflation measures how much prices rose over the past year.
And prices jumped 4.2% in May, the highest percentage increase in over 3 years.
The inflation report caused the Dow to drop almost 1,000 points after its release.
Higher inflation is bad for stocks because it keeps interest rates high, which slows economic growth.
However, higher prices aren’t necessarily a bad thing for the following companies.
When inflation hits, people automatically look to Walmart (ticker: WMT), the giant discount retailer.
But smaller discount retailers like Dollar General (ticker: DG) have better pricing power.
Dollar General stores average less than 10,000 square feet, which is tiny compared to competitors’ large 100,000-square-foot stores.
You’d think bigger is better, but the opposite is true for Dollar General.
Dollar General’s small size means it can serve a small, rural population better than a large Walmart or Target.
In many cases, Dollar General is the only store around.
So when prices need to increase, Dollar General has excellent pricing power since the closest competitor is miles away.
Dollar General is also very profitable.
The retailer’s return on equity (ROE) of 18% is one of the highest among defensive retailers.
Plus, its current price-to-earnings (P/E) ratio of 16x is the lowest it’s been in a year.
Quanta Services (ticker: PWR) is barely talked about regarding its importance for artificial intelligence (AI).
But it should be getting more press.
Quanta maintains and services energy and communications equipment all across the United States.
As more data centers come online for AI advancement, Quanta’s services are in higher demand to keep the power flowing.
Quanta’s stock price is expensive, with a forward P/E ratio around 50x, but its growth has been incredible.
Over the past decade, Quanta has grown its earnings by an average of 25% each year.
Quanta’s 20% market share will come in handy if prices rise.
Quanta has almost double the share of its next-largest competitor, so if customers don’t like Quanta’s price increase, they’ll have a hard time finding someone else to service their equipment.
Last up is the credit card processor Visa (ticker: V).
Visa has excellent pricing power since it makes a percentage off the total charge.
So when prices rise, Visa makes more money from higher credit card bills.
Because Visa’s competitors have a similar business model, switching to a “cheaper” alternative isn’t really possible.
Visa’s profitability is insane.
Its profit margin is over 50%, making it one of the most profitable companies in the S&P 500.
Also, Visa’s current P/E ratio of 28x is near its lowest point in almost 15 years!
Do you think inflation is going to get worse?
Coach Parker
Category: Stocks
