The stock market has been whipsawing as a result of new tariff announcements that add more complexity and uncertainty to the mix. While it appears as though President Donald Trump is enacting a more stabilizing approach with a temporary pause in place and exemptions for certain products coming into the U.S., investors are probably wondering about ways to protect their portfolios for whatever the future holds.
If you’re worried about tariffs, it might be a good idea to identify stocks that possess this one phenomenal trait.
Providing a tariff buffer
Implementing tariffs basically increases costs that businesses face. The biggest fear among economists is that this will lead to inflationary pressures, as the higher costs are passed to consumers in the form of higher prices. People might already be aware of this possibility, as their expectations about the economy in the short term are at a 12-year low.
While the ultimate effect of tariffs is unknown, with what seems like more questions than answers at this point, investors can focus their attention on ways of upgrading their portfolios. Maybe it’s time to add stocks that provide a tariff buffer.
Warren Buffett, the great investor who has compounded capital at a remarkable rate for Berkshire Hathaway, once said that pricing power is a characteristic of a wonderful business. Companies that can occasionally ask customers to pay more without worrying about losing them are in fantastic shape.
Apply this thinking to the current economic landscape. To be fair, no business can raise prices without limit. However, there are companies that have proven their pricing power. Coca-Cola, the beverage giant with a global presence, consistently raises prices on its products, betting that customers will stay loyal to the brand. This can offset muted unit volume growth.
Apple sells expensive devices that seem to always be in demand. Beautifully designed hardware mixed with easy-to-use software is a winning combination. Manufacturing supercars is an incredibly lucrative endeavor for Ferrari. It offers vehicles that are basically viewed as collector’s items, with perhaps the strongest pricing power out there.
Investors might not think Costco Wholesale has pricing power because of its intense focus on selling merchandise at extremely low prices. But look at the company’s growing membership base that just accepted an annual fee hike last year. Netflix also has pricing power. The leadership team of the top video streamer has consistently increased subscription fees, especially in the U.S. and Canada. This hasn’t prevented membership growth over the years.
Image source: Getty Images.
Patience is a virtue
Coca-Cola, Apple, Ferrari, Costco, and Netflix are simply examples of companies that have historically increased prices on occasion. It would make sense for the everyday investor to at least understand and appreciate pricing power, particularly within the current uncertain macro backdrop.
It’s important to keep in mind that these five stocks don’t necessarily present smart buying opportunities right now. Valuation is a critical component that needs to be factored into the decision-making process. Pay too much, and returns could be disappointing.
With that in mind, all these stocks arguably trade at expensive price-to-earnings ratios. What’s more, new developments surrounding tariffs could have more of a negative effect on some of these companies compared to others.
If valuation is less of a concern for you, then maybe it’s best to dollar-cost average into shares of Coca-Cola, Apple, Ferrari, Costco, Netflix, or any other companies with pricing power, over a 12-month span, for instance. This helps ensure that your portfolio consists of businesses that can pass higher costs to customers. It can also be beneficial to take advantage of many different price points when buying shares.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Costco Wholesale, and Netflix. The Motley Fool has a disclosure policy.
