Rising inflation is likely to be a key theme in 2022, so I’m looking at the top stocks that could do well in that environment.
The cost of living is surging. Several factors are driving rapidly increasing prices. Global supply chain issues and rising energy costs are two culprits. It seems like the effects of the 2020 lockdowns are still being felt today.
A global shortage of computer chips created delays in new car production and increased demand for used cars. Meanwhile, the cost of gas is soaring globally as a limited supply in Europe is met with increased demand from Asia. As such, wholesale gas prices in Europe have soared by more than 800% in 2021. I reckon this will likely have a knock-on effect on consumers and industries.
Fighting price rises
So what kind of stocks could do well in this environment in the coming year? I think the top picks for 2022 will display some key features. High-quality stocks could really stand out. These will include those with strong profit margins and pricing power. But don’t just take my word for it. Popular investor Terry Smith said this of high-margin businesses: “Having high gross margins means they can pass on input cost inflation to their customers.”
For the first half of 2022, I’m also focusing on stocks that aren’t pressured by high energy costs. I reckon companies that use a lot of gas and oil could face headwinds in the coming year, especially if they’re unable to pass on these costs to customers. Many companies are more digitally focused, and this could be an advantage in the coming year.
Quality top stocks
So which stocks demonstrate strong profit margins, pricing power and relatively low energy usage? I can think of several top businesses that fulfil these criteria. These include Games Workshop, which operates a niche gaming business with a loyal fanbase. It boasts 70% gross margins and tremendous pricing power.
Magazine publisher Future is increasingly operating online and is more of a digital publisher and media platform. It owns many popular magazine brands and makes its money from advertising and licencing. It makes it to my list with a 50%+ gross profit margin.
Experian is a data and information services company with several high-quality metrics including a 42% gross profit margin. This FTSE 100-listed firm provides credit information to global businesses and individuals. It also holds a strong market position and offers significant growth potential.
A word of warning, however. There can be unintended consequences to high inflation. It can push the Bank of England to raise interest rates. It already increased the base rate of interest to 0.25% from 0.1% in December. Persistent inflation in 2022 could see further hikes. What could it mean? A rise in interest rates can increase companies’ cost of borrowing. This can potentially reduce profits and could temper growth for my three top stock picks. Hopefully, operating with such large profit margins provides enough of a buffer if finance costs were to rise. Overall, as a long-term investor I’m comfortable that all three companies can withstand these economic shocks. As such I’d consider them for my Stocks and Shares ISA in 2022.
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Harshil Patel owns shares of Games Workshop. The Motley Fool UK has recommended Experian and Games Workshop. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.