3 Stocks That Can Thrive in Periods of High Inflation

If you're looking for stocks that could help your portfolio succeed even in an inflationary period, you've come to the right place. In this segment of Backstage Pass, recorded on Oct. 15, Fool contributors Toby Bordelon, Rachel Warren, and Trevor Jennewine discuss three stocks that they think can keep delivering wins for investors despite rising inflation. 

Toby Bordelon: First one I want to touch on, we had news today about retail sales.

According to a report issued today by the U.S. Commerce Department, retail sales were actually up looking pretty good. It looks like this increase is driven in part by higher prices, so inflation is actually giving us a boost, at least in nominal terms for now. I'm not quite sure if the volume of goods is still up, or if that's holding  steady, but in terms of dollars spent those are going up. That's good. The increase in sales we're seeing suggests that at least some companies have been able to pass on some of the higher prices they're seeing from inflation and labor costs to consumers, and consumers are willing to pay, though.

That's my takeaway from this report. The question here, guys, is give me one company you think has pricing power that you think will be able to keep passing on increases to consumers, assuming we see mild inflation. Let's leave out the possibility of significantly higher inflation. But assuming we have mild inflation continues for the foreseeable future, what's one company is going to do well? What's one company that can pass on these prices and so we won't see a significant drop-off in sales volume in your opinion? I'll start with you, Rachel.

Rachel Warren: I think it is interesting to note that at the end of the day consumers are willing to pay these prices even with, as we're seeing this uptick in inflation. Because at the end of the day, a lot of it is the basic goods that we all rely upon. For me in terms of a company that I think really has pricing power and can pass on price increases to consumers without seeing a significant decrease to a top or bottom line. I'm going with a big name here and that would have to be Amazon (AMZN -3.67%).

I think first of all, this company has such an immense e-commerce platform. I was looking at some statistics about this. As of February of this year, Amazon accounted for more than 40% of the e-commerce market in the U.S. alone. That's just one of the markets in which it operates in, and I think that this gives Amazon a really fantastic competitive edge. Despite the fact that the e-commerce industry itself hasn't been immune, it still continuing to control this very high-growth market where customers are paying the prices that are put forth to them.

Because whether it's goods that we need or goods that we want, people go to Amazon, people trust Amazon. I think its brand authority is something that has continued to help it be a mainstay even as inflation rises. Consumers know and trust this company, and I think that really enables Amazon to adjust its prices as needed without seeing a significant drop in its sales. It's definitely not been a secret through the years, Amazon has historically been known to have significant pricing power across the range of industries that it's involved in while at the same time growing its customer base.

I think another thing as I was thinking about this question that I really believe helped Amazon to be so well positioned, to withstand the global surge in inflation is the fact that it does have a really diversified business that draws a really diversified stream of customers. We've talked about this foothold that it has on the e-commerce market. But then you also consider this other key source of revenue and profits for Amazon, and that's Amazon Web Services, its cloud business. This is a business that has had these major names as clients, you think Netflix (NFLX 0.28%), Facebook, LinkedIn, for example.

And Amazon's market share of the global cloud infrastructure market was something of more than 30% in the first quarter of this year. Essentially it control more of the global cloud infrastructure market than either of its two competitors, Microsoft or Google. This is a multibillion-dollar market that's only growing. Then there's another industry and in which Amazon is a huge player, and that's a multibillion-dollar streaming market, which I think is on track, I was reading to hit a valuation of close to $150 billion in just the next several years here.

I think at the end of the day, you look at a company like Amazon that has a clear dominant footprint, in so many of these fast-growing industries in which it operates. I think that gives it a lot of leverage and a lot of growth potential, even amidst a rapidly changing economic environment. I think it's helped it to deal with these inflationary pressures really well, and I believe will continue to do so.

Toby Bordelon: Thank you for that. What you got, Trevor?

Trevor Jennewine: I really like that pick, Rachel. I think the cloud computing point was especially important. I just looked at their market share, and AWS actually has more market share than Microsoft and Google Cloud combined, which is impressive. I'm going to go with Netflix. I think this is one that we're all familiar with, pioneer in streaming media. I think there's plenty of room to grow the subscriber base across all of its different geographies.

Especially in places like the Asia-Pacific and Latin America, where its subscriber base tends to be on the lower side. But also I feel the same way about North America and places where Netflix has established itself. Why do I think that it can pass those prices along to consumers?

The company has really invested in original content. Going back to, I think 2013, they have over 2,000 different original shows and movies. Now they are consistent, so Nielsen ranks the top 10 streaming shows, original series, and movies. Netflix consistently has eight, nine, or ten of the top ten spots for original series.

They're making content, but it's also good content that's engaging, and so I think that differentiates it from other players in the space. The bottom line is that if you could only pick one streaming service, I think a lot of people would go with Netflix. Disney+ is a great services as well, and there's other ones out there. But Netflix was that first mover and it's got a bigger subscriber base, and theoretically that means it has more data to inform its content making decisions.

It has all that original content that differentiates it, and I think all of those things create enough value that the company can continue to raise prices over time, just like they have in the past. I think Netflix is a good pick here. What do you think, Toby?

Toby Bordelon: I like it. I like both of those. I'm going to take us in a little bit of a different direction, though, for mine, go with food company here. Our long-term viewers before we shifted to The Backstage format to The Wrap or to what we're doing now with Beat & Raise and The Five. You may remember The Wrap, and it was something of a tradition for Jason Hall to bring some kind of food question to the Wrap every Friday. And in that spirit, I'm trying to bring that back a little bit, and I'll go with the food theme for at least this question for me. I choose Chipotle (CMG 4.02%).

Chipotle, I think does have pricing power. I think they are able to raise prices up a little bit. One thing I noticed is entering, so they've introduced new products recently. They now have at least in the States, brisket. They've brisket, you can get on your tacos, you burritos, whatever, and it's actually the most expensive item. Here in Reno, which seems to be a little lower cost, in some other areas it's over $10 to get the brisket. That compares, I think, to the steak which is around $9, maybe $8 or $8.50. It's a nice little trick to introduce this new item that has not been there before, charge a premium price for it, and no one really thinks you're raising prices because it was never there before.

I like that. I think they would have done this anyway and it's been in the works for a while. But I just wonder if they would've introduce it two years ago, what the price point would've been. But I think this is fast-casual, it's a little bit higher than your typical fast food chains. I think they have some room to potentially pass on some price increases to their consumers. Now, it's limited, but they do have a little bit. I think it's much bigger than some of the lower-cost fast food chains. I think people will pay a little more for that stuff.