The Bureau of Labor Statistics released the Producer Price Index (PPI) earlier this month, which measures the price changes for goods and services at the wholesale or producer level. This important metric could indicate where future consumer price inflation may be heading and increased 0.7% month over month in August, the highest monthly change since June 2022.
The PPI is widely considered a leading indicator because it shows pricing pressures in the production process before reaching consumers. The recent increase was above economists' projections and could indicate that inflation is stickier than expected. If that is the case, three smart stock picks to help hedge against inflation are Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), Progressive (PGR -0.97%), and Costco (COST 1.01%).
1. Berkshire Hathaway's steady cash flows make it a stock for all environments
Investors are likely familiar with Berkshire Hathaway's long history of investing success under CEO Warren Buffett. Since becoming CEO in 1965, Buffett's Berkshire Hathaway stock has delivered returns of nearly 20% annually -- doubling that of the S&P 500 index.
What investors may not be familiar with is the resilience of its portfolio of privately held businesses. Berkshire Hathaway owns companies across industries, including railroad, utilities, and energy, but it's the conglomerate's insurance holdings that appeal to me if inflation remains stubbornly high.
Berkshire owns several insurers, including GEICO, General Re, Berkshire Hathaway Reinsurance, and Alleghany, which it acquired for $11.6 billion last year. Insurance companies can provide a good hedge against inflation because of the steady cash flow they generate. Buffett likes that insurance products "will never be obsolete, and sales volume will generally increase along with both economic growth and inflation."
Insurers are constantly raking in cash, also known as float, which they can use to pay out future claims and expenses. However, as long as the insurer is underwriting profitable policies, this cash pile keeps growing and can be invested in anything from short-term treasuries to long-term stock holdings. Since Berkshire acquired National Indemnity in 1967, its float has ballooned from $19 million to $164 billion last year, or 18% compounded annually.
Berkshire Hathaway has delivered stellar returns, and its insurance businesses give it a robust source of cash flows. At the end of the second quarter, the conglomerate had $150 billion in cash -- making this an excellent stock to buy for any environment, including one in which inflation remains stubbornly high.
2. Progressive is an industry leader and has adapted to rising costs over the last few years
Progressive is one of the best auto insurance companies and has run circles around the competition for decades. It was one of the first insurers to utilize driver data to help price insurance policies when it rolled out its telematics product in 2004. This driver data, including speed, braking time, mileage driven, and acceleration habits, has helped Progressive dial in its pricing models and achieve industry-beating profitability.
In the first half of this year, property and casualty insurers dealt with rising costs and posted their worst first-quarter underwriting loss in 12 years. Progressive's profitability has taken a hit, but the company still outperformed its peers in this harsh environment.
The industry has faced headwinds from higher claims costs over the past several years due to higher prices on replacement vehicles and repairs. As a result, the company has had to raise customers' premiums several times over the past few years to keep pace with these inflationary trends. Since the start of 2021, when inflationary pressures first began to emerge, the stock has gained 55% compared to the S&P 500, which is up 20% in the same period.
Progressive's stellar underwriting and ability to adapt to future cost increases make it a solid pick for long-term investors looking for solid returns and a hedge against inflation.
3. Costco's affordable products make it a go-to for customers looking to save money
When prices rise, people look for any way they can save money. Many turn to discount retailers like Costco, where they can buy bulk products at affordable prices. Costco's membership-based business model provides a consistent annual cash flow while also encouraging repeat visits by customers.
What sets Costco apart is its ability to provide goods at the cheapest prices possible. The company negotiates with vendors and operates on paper-thin margins to be a discount retailer of choice. This selling point provides the business with consistent revenue amid the harshest environments. For example, during the Great Recession in 2009, Costco's net sales fell just 1.5% -- its only down year in 21 years.
From 2020 through 2022, a period that included the pandemic-induced recession and the highest inflation readings in 40 years, Costco's revenue and net income grew by 46% and 56%, respectively. With its loyal customer base and affordable goods, Costco is another stellar stock to hold that can perform well if inflation persists.
