Tom Nash
patreon
Inflation is still here, despite not being very welcome.
🕑 Added 2022-05-31 08:40:20 +0000 UTCSo, inflation isn't going anywhere, so instead of ignoring it, lets try and mitigate its effects on our portfolios.
Good inflation of about 2% per year is actually healthy for the market, but high uncontrolled inflation will be bad for the entire economy, including stocks, bonds and even gold... contrary to what they have telling you. There is literally no place to hide.
Current inflation is almost 9%, so its definitely not the good kind of inflation.
So how do you add inflation "proof" stock to your portfolio. I said "PROOF" since there is no such thing, but certain stocks will be less impacted for sure, and those are the ones we are looking for.
The ideal company for inflationary times would be something like this: Non-discretionary products (Tampons? I'm serious don't giggle boys), in a market with no competitors (Google/YouTube). Which means a high pricing power and high margins, leading to profitability, and a high revenue growth rate. Ideally this would also be a company that is not requiring a high working capital (digital products?) and is not exposed to energy, commodity price shifts in delivering its product or service (software solutions?). This company would ideally have high cashflow and low debt to limit interest rate exposure. So, basically, Palantir or Tesla :) lol.
Let's break it apart:
Great pricing power: a company with high pricing power will be able to roll over costs to customers. How to measure pricing power? itβs a combination of how discretionary is the product is and how good is their competition.
High Margins: high margins allow for more room to absorb cost increases. For a software as a service business, the gross margin would be around 80% while a manufacturer can operate at 40-50 gross margin. For a software business, the cost of producing an additional license is almost non existent, while product manufacturing has almost a straight line of cost increases, subject to reduction of costs based on economies of scale.
High Working Capital Efficiency: how much capital the business requires to operate. Production or construction companies require a lot of capital to operate to buy materials and equipment, which means a much bigger capital requirement for ongoing operations vs a software company with a digital product for example.
Cost of capital: how much does it cost for the company to raise money, either as debt or as equity. Riskier companies β will have to pay more for capital. How much more, that would depend on the risk profile:
a. Industry - Riskier industries, will have to pay more for debt. For example, in the world of software, a whole industry might be obsolete the moment a new solution is released. Look at Zoom vs Microsoft Teams.
b. Stability of Cashflows - unpredictable cash flow means higher risk and higher interest on debt, if at all.
c. Geographic risks β if your revenue is coming for risky location.
d. Regulatory / Legal - lawsuits? FTC Anti Trust issues?
If you stay disciplined and apply these 4 tests, you will find quite a few of inflation mitigated investments, even in this market.
Tom
Comments
Arnon Ullmann
https://awealthofcommonsense.com/2020/03/a-short-history-of-dead-cat-bounces/
Arnon Ullmann
Wanted to post a few fake bounces that happened during the 2000 and 2008 crash. Here are some links to see how it looked. I think Gabe gave us a great view on the short and long term perspectives. https://www.poems.com.sg/market-journal/dead-cat-bounce-yay-or-nay/
Daniel Cognolato
I just keep reading Tesla in my head hahah
Damon Shawcross
Great food for thought and action. ππΌ
