These stocks could provide 'downside protection' as inflation soars, Bernstein says

Published Mon, May 9 20227:22 PM EDT

As surging inflation puts significant pressure on margins, Bernstein names stocks with pricing power that could outperform. Inflation has been on a tear this year. The U.S. consumer price index jumped 8.5% in March from a year ago — the fastest pace since 1981, while inflation in the euro zone reached 7.5% in April to hit a record high for the sixth consecutive month . "While U.S. inflation expectations are still in line with the Fed's long-term inflation goal of 2%, the spread between the year-over-year change in CPI and forward inflation expectations are at the highest point in over a decade," Bernstein's analysts, led by Ann Larson, said on May. 8. "Against this backdrop, we believe that owning names that have pricing power can provide downside protection," the analysts added. Stock picks Within the U.S., stocks with high pricing power can be found in healthcare, financials, and consumer sectors, according to Bernstein. Its screen turned up names including UnitedHealth and insurer Centene in the healthcare sector; Walmart and grocery chain Kroger in the consumer space, energy infrastructure firm Kinder Morgan and Fedex . The bank found that stocks in the European consumer and healthcare sectors also have high pricing power. Stocks on its screen include luxury goods firms LVMH and Hermes , tech firms SAP and Infineon , as well as Siemens Healthineers , Alcon and Coloplast in healthcare. Read more Bulls finding it's tough to buy the dip until there are signs inflation is getting under control These stocks show pricing power, a look into Q1 earnings results reveals The stocks turned up on Bernstein's Asia screen are concentrated in financials, industrials, materials and tech. They include online travel booking platform Trip.com , alcoholic beverage manufacturer Wuliangye Yibin and Taiwanese semiconductor firm Novatek Microelectronics . To identify the companies with pricing power, Bernstein ranked companies on their ability to maintain or improve gross margins. The bank looked at a company's track record of gross margin growth and gross margin stability standardized across industries. Bernstein added sales revision into its screening criteria, noting that a company receiving significantly positive sales estimates for the next 12 months could be able to make up for rising costs by increasing prices.

Inflation in the euro zone remains well-above the ECB's target, as energy and food prices soar.

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As surging inflation puts significant pressure on margins, Bernstein names stocks with pricing power that could outperform.