Soothing the sting of inflation

Companies with strong brands that consumers are willing to pay more for—often regardless of the prevailing inflationary environment and/or economic backdrop—as well as those that generate high gross profit margins, generally enable them to absorb increased costs more easily, highlights Fidelity’s Sonu Kalra.

Last summer, the U.S. Bureau of Labor Statistics reported a 9.5% year-over-year jump in consumer prices—the highest such jump in 40 years. Still, Kalra believes that certain companies may be poised to thrive against this backdrop, making them good investments.

“One of the ways that businesses often try to mitigate the negative effects of inflation is to pass on these cost increases to customers by way of higher prices,“ says Kalra, portfolio manager of Fidelity^® Blue Chip Growth Fund (FBGRX).

He adds that this is an incredibly delicate balancing act, however, as raising prices can stifle consumer demand if the firm in question does not possess ample pricing power.

In his view, firms that generally fit this description often fall into two categories: strong retail/luxury brands and software-related companies that sell must-have products.

“Many luxury brands in the marketplace benefit from the ‘exclusivity’ factor, meaning the consumers who buy them typically can and will spend more on their products,” Kalra contends.

For example, at the end of November the portfolio owned a stake in French luxury apparel and accessories group LVMH (LVMUY), and a position in Canada-based, yoga-inspired apparel retailer lululemon athletica (LULU).

Kalra noted that both are strong brands, for which he believes consumer demand should remain elevated, despite any potential price increases.

The software and services industry is another area he is watching closely. “While these firms generally don’t make anything tangible, the majority of their cost is associated with the talented people they employ,” explains Kalra.

Consequently, even though wages in the U.S. have inched up, albeit within reason, software companies that boast strong brands can, for the most part, charge more to offset that increase, according to Kalra.

The fund had several holdings in this category as of November 30, including Salesforce (CRM), a provider of customer relationship management software, and digital payment provider Mastercard (MA).

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