Prepping For Inflation

More than ever, managers seek companies with pricing power

New commentary from the Fidelity’s ‘Viewpoints’ blog, by portfolio manager Derek Janssen, examines emerging fears of inflation. Reprinted with permission. Visit here for more details.

One of the most important lenses through which to evaluate investment decisions in 2021 and beyond could be the degree to which they might be affected if inflation rises even more than expected, says Fidelity’s Derek Janssen.

“Now more than ever, I am seeking companies with pricing power that I think can pass along higher costs, in case we start to see this phenomenon broadly and in unexpected ways,” says Janssen, portfolio manager of Fidelity® Small Cap Discovery Fund (FSCRX).

The fund normally invests at least 80% of assets in securities of companies with a small market capitalization, including growth stocks and value stocks.

Fiscal Stimulus

Janssen believes unprecedented fiscal stimulus in response to the COVID-19 pandemic is still working its way through the market, but price inflation could be inevitable, partly due to limited supply for a wide range of goods.

Higher prices dent profits for companies that must pay more for raw materials and labor, Janssen notes, adding that he relies on Fidelity’s research to find firms that can easily raise their prices if their costs notably increase.

For this reason, according to Janssen, the fund counts real estate brokerage stocks Jones Lang LaSalle (JLL) and Cushman & Wakefield (CWK) among its top holdings as of July 31, its most recent holdings disclosure. Each firm garners a percentage of transactions it facilitates, so revenue generally rises with asset prices.

Similarly, staffing companies tend to easily pass along higher labor costs to customers, Janssen says. He’s favored ASGN (ASGN) and Kforce (KFRC),), both of which have seen an increase in new business bookings, as spending by clients hit hard by the economic effects of COVID-19 have rebounded.

Lastly, Janssen believes certain distributors can benefit from rising prices in the short term by holding inventory before reselling it, with Beacon Roofing Supply (BECN) representing one example.

“I’m not making predictions about inflation or anything related to the economy because that’s not my job or expertise, but I do think it makes sense to prepare for all scenarios,” Janssen says.