Nov 26, 2021
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High inflation rates across the globe 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.
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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.
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 per cent.
The company is also capturing the full price of its products in an increasingly digital, direct-to-consumer business model.
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Management believes digital sales could continue to grow from 20 per cent of revenue currently to about 40 per cent 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 per cent so far in 2021.
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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.
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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 per cent of Berkshire Hathaway’s investments portfolio for good reason: The business just keeps growing profits through all economic cycles.
Apple is up about 13 per cent year to date and trades at nearly $150 per share. But if you’re on the fence about jumping in at the current level, Wealthsimple's investing app allows you to buy a fractional share of Apple.
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 per cent while adjusted gross margin improved 390 basis points to 57.5 per cent.
In fact, management proactively started adjusting its pricing for inflation back in 2020.
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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 per cent in 2021.
Read more: The ultra-rich are bailing on volatile stocks right now — these 4 shockproof assets are their new safe havens
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.
U.S. Farmland REITs (real estate investment trusts) like Gladstone Land Corporation (LAND) and Farmland Partners (FPI) are great options for investors looking to diversify further, since you need to be an accredited investor to invest directly in farmland (both in the U.S. and Canada)
Those looking to add farmland investments should certainly explore online trading platforms. The best sites offer resources and tools to help investors make informed decisions as they build and manage their investment portfolios.
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Jing is an investment reporter for Money.ca. Prior to joining the team, Jing was a research analyst and editor at one of the leading financial publishing companies in North America. Jing has covered numerous aspects of the financial markets, from blue chip dividend stocks to small cap tech stocks to precious metals and currency. An avid advocate of investing for passive income, he wrote a monthly dividend stock newsletter for the better half of the past decade. In his spare time, Jing plays basketball, the violin and the ukulele.
