(Money Magazine) -- You're no doubt feeling the sting of rising prices on the essentials, like food and gasoline. Well, companies are feeling that same pain, as soaring costs for raw materials such as oil and copper threaten their bottom lines.
Weak ones that can't pass along those costs -- for fear they'll lose business -- are already being squeezed. Just look at how poorly airline stocks have been doing since fuel costs shot up this year.
"If you have to have a prayer session before raising the price by 10%, then you've got a terrible business," Warren Buffett recently said.
For corporate America, the pressure is only likely to get worse once overall inflation really starts to take off.
To stoke economic growth, the Federal Reserve has been pumping trillions of dollars into the economy -- money that, in theory, is designed to get into the hands of consumers and, once spent, could potentially drive up prices.
Right now "core" inflation -- which discounts food and energy costs -- is growing at a relatively tame annual rate of 1.1%. But that could change in a hurry.
Worrisome inflation is already showing up in key segments of the economy. It's also sprouting up overseas, as governments in Asia and Europe are set to turn off their stimulus spigots to try to keep a lid on prices.
"With so much money sloshing around, inflation could accelerate fairly quickly," says Brad Sorensen, director of market and sector analysis at Charles Schwab.
But as big a threat as inflation is, rising prices can actually help you sort out the winners from the losers in your portfolio. Buffett described "pricing power" as the single most important factor in evaluating a business.
Of course, some sectors of the economy are naturally suited to pass along costs, like energy and commodity-related businesses, whose shares have spiked already. (Which stocks are moving now)
But there are plenty of businesses in other industries that have a surprising capacity to jack up prices without turning off customers and turning down sales.
What you want to look for are shares of strong companies with proprietary products, deep-pocketed customers, industry dominance, or brand loyalty.
Here are four such stocks that have the power to take inflation:
Patent-protected drugs have long provided Big Pharma with a healthy dose of pricing power. Prices on brand-name drugs, after all, have been rising faster than the overall rate of inflation -- in 2010 the average price hike for top sellers was 6.9%.
The catch: Major drugmakers are now up against a cliff of expiring patents over the next several years.
The French drugmaker Sanofi-Aventis (SNY) is likely to be an exception, says Citigroup analyst Mark Dainty. That's due in large part to Sanofi's acquisition of biotech giant Genzyme, whose $4 billion in annual sales should offset Sanofi's lost revenue from patent expirations.
Genzyme also gives Sanofi a new area for growth: Its treatments for rare genetic diseases can cost tens of thousands of dollars for an annual supply. But given their life-saving properties -- and the lack of alternatives -- Genzyme can command ultra-premium prices.
Yet Sanofi shares have been at a discount due to concerns the company may have overpaid for Genzyme. At around $35, the stock is trading at a price/earnings ratio of about 8, based on projected 2011 earnings. But Dainty thinks it should trade closer to the industry average P/E of around 10.
Many consumer companies wilt when inflation spikes. Not LVMH (LVMUY). The maker of Louis Vuitton handbags, Dom Pérignon champagne, and other iconic luxury goods caters to a high-end clientele that doesn't need to look at a price tag before deciding on a purchase.
"Price is almost an afterthought to the Louis Vuitton consumer," says Wendy Trevisani, a fund manager at Thornburg Investment Management.
It must be. The company hiked prices by 9% in October in Europe -- with no negative impact.
While you may not be able to score a discount on LVMH's products, you can still get the stock on sale relative to some luxury-good peers.
That's due to fears the strengthening euro might hurt foreign sales. But another source of pricing power is the growing Chinese luxury market. Almost a quarter of LVMH's sales come from China, where customers are willing to pay about 35% more for European-made Louis Vuitton bags than do consumers in Europe.
Caterpillar, the world's largest manufacturer of bulldozers and heavy construction equipment, twice announced price hikes in the past six months.
First, there's the company's massive network of 180 dealers in 120 countries and its reputation for customer service. "Avoiding downtime is one of the most critical considerations for customers when they're making an equipment purchase, and they're willing to pay up for that assurance," says Morningstar analyst Adam Fleck.
And while surging prices usually hurt manufacturers, they can help Caterpillar's sales. After all, if copper and iron ore prices are climbing owing to soaring demand, mining firms racing to boost production will need more of CAT's heavy equipment.
The Magic Kingdom has long been able to exploit the popularity of its beloved characters -- from Mickey Mouse to Hannah Montana -- to command higher prices across its theme parks, music business, and consumer products.
About two-thirds of the sports network's revenue comes from affiliate fees -- ESPN's cut of the monthly subscriptions paid to cable and satellite providers by the 100 million -- plus homes receiving the channel.
ESPN gets about $4 per subscriber -- the highest rate of any cable channel -- and that revenue has been rising faster than the network's programming costs, notes Morgan Stanley's Benjamin Swinburne.
Viewers are so fanatical about ESPN programming that no cable provider will dare unplug the network over expenses. And ESPN's affiliate fees are expected to keep rising about 10% annually over the next four years. Talk about inflation protection.
If you don't want to own individual stocks, here are four mutual funds with investments you'll want to own when inflation is on the rise.
SPDR Dow Jones Global Titans ETF (DGT): This index fund owns 50 of the world's biggest companies -- its average holding is three times larger than the typical stock in the S&P 500.
Yacktman Fund (YACKX): Co-manager Donald Yacktman focuses on high-quality blue-chip companies with reliable earnings and long-term competitive advantages over their rivals.
SPDR S&P Dividend ETF (SDY): Companies that can boost dividends year in and year out typically have stable earnings. And businesses with reliable profits generally have pricing power. This ETF tracks the S&P High Yield Dividend Aristocrats index, a collection of firms that have increased dividends for at least 25 consecutive years.
The Permanent Portfolio (PRPFX): This asset-allocation fund launched in 1982 during the last big inflation scare, offers a twist on pricing power. It seeks to preserve the purchasing power of its shareholders by investing in assets ranging from stocks to bonds to currencies to commodities to real estate.
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