These strong pricing power stocks are set to beat the market, UBS says

Published Tue, Apr 5 202211:53 AM EDTUpdated Tue, Apr 5 20221:22 PM EDT

As inflation roars at a pace not seen in decades, UBS highlighted companies with pricing power to protect profits. Pricing power refers to a company's ability to raise prices without losing business. Companies with pricing power tend to weather inflationary periods better than competitors because they can pass on higher costs to customers. The U.S. consumer price index for February rose 7.9% from a year ago, the highest level since 1982. "We expect strong pricing power companies to continue their outperformance. The combination of elevated inflation and a shift towards a later cycle environment should be important catalysts," UBS' Keith Parker said in a note Tuesday. UBS looks at several variables to measure pricing power. The firm calculates a "markup," or the "extent to which a company has set its price over and above marginal cost." UBS also looks at cost sensitivities to wages, commodities and supply chain. Analysts additionally examine margin levels and industry market share. The firm's global strong pricing power screen has outperformed the weak pricing power screen by about 20% since 2021, UBS said. Plus, shares of these companies with strong pricing power are relatively cheap, UBS found. "Despite their protection against higher input costs, strong pricing power stocks appear reasonably cheap vs weak pricing power companies," Parker said. Take a look at five names with strong pricing power, according to UBS' analysis. UBS said companies with strong pricing power "have large tilts to quality, growth and momentum (both price and earnings)." Apple made UBS' pricing power screen. The firm noted Apple has a history of successfully increasing prices while seeing rising demand. The technology company "has been able to maintain and raise prices. End-market demand has been improving year-over-year leading to elevated 'wait times' despite increased product procurement/production," UBS analyst David Vogt said. Nike also made the list. UBS attributed Nike's pricing power to its brand strength. "Nike brand currently has #1 in mindshare globally and the company has significant room to reduce promotions," analyst Jay Sole said, citing a UBS proprietary survey. Deere is another company with strong pricing power, according to UBS. The firm said Deere is the leader of the agricultural sector and "highly valued by farmers. "High demand coupled with surging prices of used ag equipment gives Deere some bargaining power," UBS Steven Fisher said. Nucor and Nvidia also made UBS' list.

The Apple logo is seen on a window of the company's store in Bangkok on February 14, 2021.

Mladen Antonov | AFP | Getty Images

As inflation roars at a pace not seen in decades, UBS highlighted companies with pricing power to protect profits.