At an annualized rate of just 1.8% over the six year period to March 2015, inflation hasn't been a problem in the post-crisis era (rather the opposite, in fact -- the fear was that deflation could occur.) But as we reach six-and-a-half years of the Fed's zero interest rate policy, there is always the risk that inflation could accelerate (even as the Fed is paving the way for what will be the first rate increase in at least nine years). If that is the case, here are three stocks our analysts believe are well-positioned to outperform the broad market:
Alex Dumortier: In an inflationary environment, you want to own shares of companies with a competitive moat that can pass on cost increases to their customers via higher prices.
Branded food and beverage companies fit the bill, including the soon-to-be-formed Kraft Heinz Company, the product of the planned merger of H.J. Heinz and Kraft (UNKNOWN:KRFT.DL). In order to participate, you can buy Kraft shares now and receive shares of Kraft Heinz on a one-for-one basis or you can wait until the merger is completed to buy shares of Kraft Heinz directly (the transaction is expected to close in the second half of the year).
The combined company -- the third-largest food and beverage company in North America and the fifth-largest in the world -- will boast a terrific portfolio of brands, including A.1. barbecue sauce, Heinz ketchup, and Philadelphia cream cheese.
Furthermore, minority shareholders in Kraft Heinz will be partnering with super-investor Warren Buffett and branded food and beverage company wizards 3G Capital. Buffett's Berkshire Hathaway (NYSE:BRK-B) and 3G Capital partnered in 2013 to acquire H.J. Heinz and will own 51% of Kraft Heinz. At 23.3 times forward earnings, per research firm Morningstar, shares of Kraft don't look don't look particularly cheap -- but neither did the price Buffett and 3G Capital paid for Heinz. Nevertheless, 3G Capital managed to increase intrinsic value substantially in short order, which was instrumental in making the current deal possible.
Rising inflation is one of the criteria the Federal Reserve uses when deciding when it should raise interest rates, which could benefit the banks, both directly and indirectly.
For the direct benefit, consider how banks make their money. Banks get most of their money from low-cost deposits, such as savings account and CDs, then loan that money to other customers at a higher interest rate. The "spread" between the two rates is how the bank profits. And, as interest rates rise, this spread tends to get wider, hence banks' profits increase.
The indirect benefit comes from the fact that inflation is generally a sign of a growing, healthy economy, which means that people are more comfortable making big purchases (more loans), and fewer consumers have trouble paying their bills (lower default rate).
Wells Fargo in particular stands to benefit from this, as the majority of its revenues come from this kind of consumer banking, and not investment banking and trading like many of its peers. In fact, of Wells Fargo's $21.3 billion in revenue last year, more than half of it ($11 billion) came from interest income. The remainder of Wells' revenue mainly came from fee income, such as service charges on accounts, investment fees, and credit card fees.
In other words, Wells Fargo has a comparatively straightforward, low-risk business model and stands to benefit once inflation and interest rates begin to rise.
Dan Caplinger: As Alex points out, the best companies in an inflationary environment are those that can afford to pass on any rising costs to their customers. Nike (NYSE:NKE) is a great example of such a stock, with a huge brand-name presence that carries worldwide recognition and a willingness among consumers to pay up for high-quality athletic footwear and apparel.
Nike has done a good job lately of going beyond its dominant position in the North American market and reaching out to a more global audience. For instance, its huge marketing push in conjunction with the 2014 World Cup in Brazil demonstrated a new commitment to soccer, the most popular sport in the world, and Nike succeeded in making a much bigger impression in a sport in which it had previously taken a backseat role. At the same time, Nike has capitalized on rising interest in fitness generally, and with wearable computing being a primary encouraging factor in getting more people into shape, Nike should see continued rises in demand for its products well into the future.
Best of all, Nike has wide margins on many of its products, meaning that inflation has minimal impact on actual cost but can support price increases that can actually boost overall profitability. With so much going for it, Nike makes a good investment regardless of whether inflation rears up in the next few years or not.