How Should You Invest When Inflation Is High?

Inflation is running at its highest level in over three decades, and it looks like it might stay elevated for longer than most experts had expected. In this Fool Live video clip, recorded on Jan. 27, Fool.com contributors Matt Frankel, Travis Hoium, Rick Munarriz, and Jose Najarro give their thoughts on the best ways to position your portfolio.

Travis Hoium: There's sort of a theme here: questions about inflation and rising interest rates, this pullback on free money from the Fed. I just want to bring this out to a broad question to all of you and ask what your thoughts are on. I think we're pretty clear that rates are going to rise in 2022.

I saw something this morning that said that traders are expecting five rate increases. I think we're somewhere in that three-to-five range is the expectation. Inflation seems to be here to stay, maybe transitory, maybe not. Again, to redetermine: What are your thoughts on these two dynamics? What happens to the market? Then how you're thinking about it from specific companies that you're looking at, too? Matt, I'll start with you.

Matt Frankel: Well, I do think inflation is going to be tougher than the Fed thinks to control, so I'm more toward the five-to-six rate hikes than the three. You want to look for companies that have pricing power. I'm known as the real estate investment trust guy at the Fool. Real estate stocks can raise rent as inflation increases. It's a great inflation-resistant business.

Think of companies that could charge whatever they want for their products, Apple (AAPL -0.60%) is one that immediately comes to mind, has great pricing power. In the face of inflation, which I think is not transitory, I think we're going to have a few years of above-average inflation. Look for companies with a lot of pricing power.

Jose Najarro: For me, I'm mainly focus in tech, and I do believe tech could take quite a hit. But at the same time, I do focus on some of these companies that do have pricing power, in my opinion -- semiconductor markets right now. Obviously, we have this high chip demand, outpacing supply. Who knows how long that would last? Theoretically, the semiconductor market has always been very cyclical, where companies over-order and then they hold off a period of a few quarters before restarting that order, which fluctuates the revenue for some of these markets.

I don't know if I'm being biased here a little bit, but I do believe the overall different markets that are happening -- autonomous driving, data centers, artificial intelligence, cybersecurity -- all these are happening at the same time, that even though the semiconductor companies might still be cyclical, I believe that cyclicality will be a lot shorter than normal. At the same time, I do believe volatility will continue to hit. But for me, I'm still focused on the semiconductor companies for the long term.

Rick Munarriz: Again, I'm going to go with a personal family anecdote explaining why I think the high rising rates can be an opportunity for some companies -- and not just financially, I'm just talking just in general. My father recently retired, retired a few years ago. But he ran a very successful frozen-food warehouse distributorship for basically about 40, 50 years until he retired. He always said that his best time, like the time that they had the most growth, was in the late '70s. If you think back, you have to be a historian, this is a time of hyperinflation, and everything was going crazy. But because his company, he had basically had nothing borrowed, it was basically a cash-rich company at that time, they were able to take advantage while everyone else had to raise prices, had to borrow at heavy rates.

I think you're getting a lot of the growth stocks have been hit the hardest are these companies with very strong cash and very limited, if negligible, debt. A company that I believe Matt has written about before, I know it started off with the real estate side, Latch (LTCH 37.97%), which is a company that does -- basically it's a keyless entry system into apartment buildings, but very high-tech, integrates in smart homes and intercom systems. Great for the landlords because they can charge more and to get customers in and out, they don't have to be there to show a building. That company has fallen to the point where almost half of its market cap is now cash.

This is a company where, yeah, it could keep falling, but that [inaudible] is looking so close, and when rates move up, not only will that cash ideally be maybe making a little money, but because these companies that have cash, like Microsoft (MSFT 1.44%) going after Activision (ATVI), these very cash-rich companies can actually start buying some of these pieces. I'm excited looking at the companies that have really clean balance sheets, which is something I never really considered before when interest rates were low and the playing field was level. But I think the next year or so is going to be very rewarding for the companies that have a lot of capital, a lot of resources at their disposal to offset with everything else happening everywhere else.