These small-cap stocks have pricing power to battle higher costs, Goldman says

Published Fri, Oct 8 202112:24 PM EDTUpdated Fri, Oct 8 20211:52 PM EDT

Goldman Sachs has selected several small-cap stocks with the pricing power necessary to weather strong inflation. Pricing power describes the effect that a price change in any given product has on the demand of that product. A company with strong pricing power and a unique value proposition should be able to raise the price of a product without dampening the demand for that product. With inflation at its highest in 30 years , many investors are looking for investment opportunities in such companies. "Rising input costs, supply chain challenges and labor constraints continue to be front and center issues for corporates and investors," Goldman said in a note this week. "Specifically, our Portfolio Strategy team estimates that Russell labor costs equate to 16% of aggregate revenues vs. 11% for the S & P 500, making them more vulnerable to rising wages." The small-cap Russell 2000 index has outperformed the S & P 500 by nearly 6% since mid-August, Goldman noted, amid a rise in the 10-year U.S. Treasury yield and oil prices — macro moves that have historically supported small caps. Goldman highlighted buy-rated companies its analysts expect will have strong pricing power and operating leverage through 2022. Here are some of their picks: Goldman analysts expect gross and operating margins to recover to above 2019 earnings levels in 2021 and see room for more expansion through 2022 earnings. The firm included a slew of energy and industrial companies like Kosmos Energy , Gates Industrial , Herc Holdings , Avient and Evoqua Water Technologies . Analysts expect Kosmos' gross margins to expand to 45% in 2022, compared to 23% in 2019 and a decline of 1% last year. The company's shares have increased about 35% this year. Wingstop is the only restaurant stock on the list, and its gross margins are expected to expand to 81% this year and in 2022 from 80% in 2020. Green Plains , an ethanol producer, is expected to see one of the biggest gross margin expansions. Goldman expects to see 14% by next year, compared with 2% in 2019.

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Goldman Sachs has selected several small-cap stocks with the pricing power necessary to weather strong inflation.