These stocks have pricing power to protect margins as costs jump, UBS says

Published Tue, Oct 5 20213:00 PM EDTUpdated Tue, Oct 5 20214:58 PM EDT

UBS has chosen a handful of stocks that are set to thrive in the face of inflation due to their strong pricing power. Pricing power shows the effect that a price change in a given product has on the demand of that product. If a company with strong pricing power raises prices, that increase may not have a negative effect on demand, if it has a unique value proposition – like Apple and the iPhone. UBS said in a note Tuesday that it should be "an even more important theme for relative returns with surging shipping costs, rising raw materials, supply chain issues and accelerating wage growth." UBS' list builds on the firm's previous work around strong pricing power stocks, which it has said tend to outperform during and after periods of high inflation . By some measures, inflation is at its highest level in about 30 years . The core personal consumption expenditures price index, the Federal Reserve's preferred measure of inflation, was up 3.6% in August from the same time a year ago, the Commerce Department said Friday. Market strategists at UBS assessed pricing power trends, cost pressures and margin outlooks for stocks across the industries in their coverage universe. They then found stocks that are buy rated by the firm's analysts, have at least 10% upside to price target and scored in the top 33% within their respective sectors based on UBS's composite score for pricing power, margin momentum and input cost exposure. Here are some of the strong pricing power companies they say are set to outperform: Apple is the largest company by market cap on UBS' list. The firm sees 23% upside to a price target of $175 and said it expects demand will exceed pre-Covid levels in the next three years even with higher average selling prices. Thanks to the company's market share in the global PC and smartphone markets, UBS also thinks it can introduce a branded battery electric vehicle at some point and achieve 5% market share in that sector. Apple shares have increased about 7% on a year-to-date basis. While there's no shortage of competition among athletic and athleisure retailers, UBS sees Nike as a long-term outperformer and has a $185 price target on the stock, implying 26% upside. It's up about 6% this year. Shares have underperformed lately after Nike warned about supply chain issues. "We believe the market doesn't fully appreciate how Nike's investments in product innovation, supply chain, and e-commerce are working in concert to drive unit growth and average selling price increases," analyst Jay Sole said in the note. "The Nike brand currently has #1 in mindshare globally and the company has significant room to reduce promotions." The company with the biggest implied upside, the crude and natural gas company EOG Resources , will face some inflationary pressure going into 2022, but UBS expects its capital efficiency to offset some of that pressure. It sees 42% upside on EOG. The stock has gained 75% this year.

An employee serves a customer in the Apple store on Regent Street in London.

Chris Ratcliffe | Bloomberg | Getty Images

UBS has chosen a handful of stocks that are set to thrive in the face of inflation due to their strong pricing power.