In my search for new stocks to buy and to justify holding on to current positions, I ask myself whether or not the company in question has pricing power—or is there an alternative name in the sector that has it or at least an advantage in that metric.
In my opinion, the sectors where pricing power—and the edge it can give investors—is most pronounced are health care and consumer discretionary. (A clear and current example of a sector that went in the opposite direction, from strong pricing power to weak, would be the energy sector.)
There's a simple reason why drug company stocks rise in value when they have new drugs on the market that cure nasty diseases. These drugs come with something that is incredibly valuable that protects them from competition—a patent-protected franchise that allows them to charge very high prices for a very long period of time.
The consumer discretionary sector, meanwhile, is in the business of making things that people want, as opposed to need. In a consumerist world, if given the choice of betting on stocks of companies that sell burritos and coffee or those that sell toilet paper and hammers, I'll bet on the first two every time. As human nature dictates, our wants have a way of turning into a need.
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When a company sells something that people want, the pricing power becomes intense, and at least some people are always willing to pay up. And with reduced spending at the pump, consumers have found the extra cash to splurge a little. Consumer discretionary stocks—some with pricing power and many that at least don't have to lower prices—are beginning to show this market dichotomy.