Companies with pricing power are a great place to hide out as inflation hits, Wolfe Research says

Published Thu, Oct 14 20212:41 PM EDTUpdated Thu, Oct 14 20213:40 PM EDT

As inflation heats up, Wolfe Research recommends investors look at shares of companies with the ability to pass those cost increases onto consumers. "We expect inflation to be the #1 market driver from here on out," Wolfe Research chief investment strategist Chris Senyek said. "We believe that inflation trends and their influence on the Fed will be the most important drivers of overall market returns, sector rotation, and thematic performance in the months ahead." On Wednesday, the Labor Department said the September consumer price index jumped 5.4% year over year, the biggest jump since 1991. Senyek said that, in terms of positioning, investors should look to companies that have 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. Wolfe Research screened for S & P 500 stocks it believes have the largest amount of pricing power, which hones in on companies with high gross margins. "The screen below includes S & P 500 companies that (1) have produced gross margins in the top quintile of their industry group over the past three years, and (2) reported a gross margin during 2Q21 earnings season that was higher than their pre-pandemic gross margin reported in 2Q19," Senyek said. Take a look at the list here: Several retailers show up on Wolfe Research's screen including Coach-parent company Tapestry , Ralph Lauren and e-commerce retailer eBay . Plus, food companies that made the list include Coca-Cola , McDonald's , Walmart and Constellation Brands . Coca-Cola CEO James Quincey told CNBC earlier this year that the beverage giant will raise prices to offset higher commodity costs. Facebook , Adobe and NetApp are the technology names that Wolfe Research think have the most pricing power. Adobe has the highest gross margins of any stock on the list. Advance Auto Parts also earned a spot on Wolfe Research's list. — with reporting from CNBC's Michael Bloom.

A delivery truck driver unloads Coca-Cola Co. soft drinks in Lawrenceburg, Kentucky, U.S., on Monday, Feb. 10, 2020.

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As inflation heats up, Wolfe Research recommends investors look at shares of companies with the ability to pass those cost increases onto consumers.