Where to find inflation-resistant stocks

Terry Smith’s latest update contains some valuable pointers for investors looking to protect against inflation.

Terry Smith
Smith: owning “quality” stocks makes his portfolio more resilient
(Image credit: © Image Scotland / Alamy)

A slowing economy plus higher inflation, represent a tougher environment for investors more used to low interest rates and steady growth. Fund managers are now talking up the “pricing power” and “inflation-proofing” characteristics of their holdings. But what traits can really shield a company from the worst ravages of inflation?

In his latest letter to investors, fund manager Terry Smith makes two key points about how owning “quality” stocks makes his portfolio more resilient against both inflation and slowing growth. Firstly, Smith looks at the impact inflation has on a company’s material costs. The average company in his portfolio has a gross margin of 60%, against his estimate of 40% for the average large listed company. These higher margins offer inflation protection – if the average cost of goods sold rises by 5%, his portfolio will see overall costs rise by two percentage points (that is, 5% of 40% (100%-60%)); the average big company will see a rise of three (5% of 60% (100%-40%)).

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Stephen Clapham

Stephen is an experienced investment analyst who provides investing courses online and in person through his website behindthebalancesheet.com