2 Plays to Profit on Those Bare Necessities
That sums up a couple hours I spent on Walmart’s website the other night.
The rumor is that they were restocking Xboxes for online purchases, and I’m hellbent on snatching one as a Christmas gift for my boys.
Every time I refreshed my screen, I got the same message: “30 minutes before this item becomes available.”
Then out of the blue, I got this notice: “Sold out.” (Some choice words slipped out after that.)
Other enterprising citizens must’ve seen this Xbox supply shortage coming. I can now find quite a few consoles on various e-commerce sites.
But I’d have to shell out at least $500 more for the privilege of securing one.
I’m not paying more than I have to. Besides, it shouldn’t be too hard to find a different gift (I hope … what with the warnings of many shortages this holiday season).
But it got me thinking about the nice-to-haves versus the must-haves.
And who truly stands to capitalize on the supply-side shock that’s disrupting more than just Xbox.
The Bare Necessities
By my own choice, I’m not shelling out more than necessary for that Xbox.
Sure, there’s a shortage, but Microsoft isn’t boosting prices so far.
Maybe it knows I have other choices, or that its product is a nice-to-have. Or maybe it knows that I know that the supply chain will eventually correct itself.
But what if we weren’t talking about an Xbox?
What if I was looking for weekly groceries for my family?
I don’t have the luxury of waiting when it comes to the bare necessities. I’m talking about our most basic needs, such as food and beer … OK maybe not the latter.
But seriously, ask yourself what your must-haves are, and in that answer you’ll discover the types of companies that have true pricing power.
Here’s why that’s important…
Follow Pricing Power
Given the stretched level of valuations, there’s little room for error on the profit forecast.
Earnings are the most important thing right now, and profit margins are at all-time highs, as you can see below:
Investors are fixated on the ability for companies to pass higher costs down the line and maintain their fat margins, because that means they can maintain their earnings.
UBS had a recent study that showed up in The Economist and it gives some insight into the types of companies that can pass on higher costs without impacting their sales. You can see that in the table below:
The study also showed that firms with strong pricing power outperform those with weak pricing power as inflation levels accelerate.
At 6.2%, the consumer price index was reported at the highest level in 30 years!
So long as elevated levels of inflation last, look to those companies in sectors with strong pricing power such as the Consumer Staples Select Sector SPDR (NYSE: XLP) and Communication Services Select Sector SPDR (NYSE: XLC).