Warren Buffett says this is the best type of business to own when inflation spikes — in other words, what you should buy right now
High inflation rates in the country have become a serious concern on Wall Street.
But fortunately for everyday investors, Berkshire Hathaway chief Warren Buffett has plenty of experience in navigating such an environment.
Buffett managed a stock portfolio through periods of double-digit inflation rates in the 1970s and has plenty of advice on what to own when consumer prices spike.
In a 1981 letter to Berkshire shareholders, Buffett highlighted two characteristics that make a business well adapted to an inflationary environment: 1) an ability to increase prices easily, and 2) an ability to take on more business without having to spend too much in order to do it.
In other words, aim to invest in asset-light businesses with pricing power.
Let’s take a quick look at three companies that fit that description. One (or all) of them might be worth purchasing with your spare pennies.
Nike (NKE)
Nike is a global footwear powerhouse that commands high customer loyalty.
Customers are willing to pay top dollar for signature gear associated with high-profile athletes like LeBron James and Michael Jordan.
Despite inflationary pressures, Nike continues to expand gross margins and post solid returns on equity well above 30%.
The company is also capturing the full price of its products in an increasingly digital, direct-to-consumer business model.
Management believes digital sales could continue to grow from 20% of revenue currently to about 40% of the business by 2025. And price increases could kick in as early as next year.
Amazingly, profit margins may keep expanding, even as operating costs rise with inflation.
Nike shares are up about 19% so far in 2021.
Apple (AAPL)
Global demand for Apple’s premium-priced hardware is growing, as are adoption rates for its high-margin Apple services.
Strong brand identity, user friendliness, and a wide range of fully integrated products are powerful attributes that aren’t going away any time soon.
Customers just can’t afford to live outside the Apple ecosystem. That gives the tech giant more freedom to play with pricing as inflation spikes.
The company’s latest M1 chips, which will gradually replace Intel’s CPUs in every single Mac, underscore its commitment to constant innovation.
Apple’s ability to pass rising costs to a global consumer base without significant loss of sales volumes is undeniable.
Warren Buffett has allowed Apple to grow to 40% of Berkshire Hathaway’s investments portfolio for good reason: The business just keeps growing profits through all economic cycles.
Apple is up about 13% year to date and trades at nearly $150 per share. But if you’re on the fence about jumping in at the current level, some apps might give you a free share of Apple just for signing up.
Levi Strauss & Co. (LEVI)
A market leader in the denim business, Levi Strauss has been firing on all cylinders of late.
Specifically, its well-known brand and a flexible business model have enabled management to grow the top line without sacrificing pricing power.
In the most recent quarter, revenue increased 41% while adjusted gross margin improved 390 basis points to 57.5%.
In fact, management proactively started adjusting its pricing for inflation back in 2020.
The company also sources raw materials from 24 different countries. And that kind of supply chain diversification provides Levi Strauss with plenty of flexibility during times of crisis.
Levi shares are up more than 30% in 2021.
The ultimate ‘forever asset’?
Warren Buffett once said that his favorite holding period is forever.
But forever is a long time, and since companies rise and fall, growing your wealth by never selling a share may not be the best strategy.
But there might be one inflation safe haven that’s worth holding forever — U.S. farmland.
No matter how high or fast consumer prices climb, people still need to eat. And it just so happens that Buffett’s good friend Bill Gates is America’s largest private owner of farmland.
These days, new platforms allow you to invest in U.S. farmland by taking stake in a farm of your choice.
You’ll earn cash income from the leasing fees and crop sales. And of course, you’ll benefit from any long-term appreciation on top of that.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
