Buy these stocks with pricing power as inflation runs rampant, UBS says

Published Wed, Sep 29 20212:36 PM EDTUpdated Wed, Sep 29 20213:22 PM EDT

Firms with plenty of pricing power are poised to do well when inflation rises, and UBS has chosen a few companies that could thrive. Strong pricing power stocks tend to outperform during and after periods of high inflation, the firm said in a note to investors Tuesday, adding the trend is most pronounced among large cap companies like those in the financials, energy and utilities sectors. The Federal Reserve has a 2% inflation target. Last week, policymakers projected their key inflation measure — the core personal consumption expenditure price index — at 3.7% for this year. That's up from June's projection of 3%. "We expect the pricing power theme will continue to evolve and play out over the coming quarters" considering the surge shipping costs, rising raw materials, supply chain issues and accelerating wage growth, strategist Keith Parker said in the note. "Following periods of elevated inflation, our quantitative screen of strong pricing power stocks has outperformed weak pricing power stocks by 20% in the subsequent 12 months," he added. "The upcoming Q3 earnings season could be another important catalyst for this theme, with rising input costs and supply chain disruptions potentially having a more visible impact on earnings results and surprises." Analysts at the firm assessed pricing power trends, cost pressures and margin outlooks for stocks across 33 industries in their coverage universe. Here are 10 companies they say have strong pricing power and are set to outperform: UBS highlighted Puerto Rico-based Popular and Honolulu's First Hawaiian among their bank picks. Both companies "are beneficiaries of having island franchises that are essentially oligopoly banking markets, which in turn drives higher pricing power," UBS analyst Brock Vandervliet said. Popular shares are up nearly 40% in 2021, and First Hawaiian's share price has gained roughly 25%. For picks in alternative energy, the firm highlighted Generac Holdings and Solaredge Technologies . Generac has gained about 78% this year. Solaredge is down 17% in 2021. Keurig Dr. Pepper , which has added 7% this year, also made the list. The soft drink industry's "consolidated natures" and beverages' "discretionary nature" as an affordable luxury supports pricing power and consumers may be less price sensitive with these products, UBS found.

Generac Holdings Inc. generators sit stacked at the ABT Inc. warehouse in Glenview, Illinois.

Tim Boyle | Bloomberg | Getty Images

Firms with plenty of pricing power are poised to do well when inflation rises, and UBS has chosen a few companies that could thrive.