Inflation has been a hot topic in the investment community in the last two years. Every investor wants to protect their portfolio from losing purchasing power by diversifying into different asset classes such as real estate, foreign currencies, gold, real estate, crypto, etc. We think one of the best hedges against inflation is through the ownership of great businesses with significant pricing power that could raise prices to offset costs pressure without losing volumes. Below we have screened for companies with the following criteria:

• Gross margin of 50% or higher
• Market cap larger than $100 million
• Net debt to EBITDA ratio below 3.0x

The criteria above reflect companies that have a gross profit margin of more than 50% - we think that these are good signals for companies with good pricing power. We believe that companies with strong pricing power have the ability to do well in an inflationary environment for these particular reasons: 1) The ability to raise prices to offset inflation without losing volumes helps companies maintain their profit margins 2) Pricing power allows companies to price their with flexibility, sometimes even faster than average inflation rates of 3-4%, leading to operating profit margin expansion 3) A high gross margin can be a powerful lever for organic growth over the long term, especially for companies with mature volume growth.

Here is the screener:

Additionally, having a conservative balance sheet not only lowers the company’s interest expenses amid rising interest rates, but also leaves room for the capability to leverage up and play offence while competitors preserve cash. This is why we have included a net debt to EBITDA ratio of less than 3.0X. We prefer companies that are over $100 million in market cap, as these companies are more mature, and have a reasonable track record for investors to evaluate.

The list above includes some of the familiar names that we cover in our Model Portfolios and coverage lists such as Topicus.com Inc. (TOI), Constellation Software Inc. (CSU), TMX Group Ltd. (X) and A and W Revenue Royalties Income Fund (AW.UN).

It is important to note that we have excluded the Energy and Materials sectors from the screener, as these two sectors experienced abnormal tailwinds in the last two years due to inflation and supply shortages. In our view, companies that have an attractive gross margin over a long period of time do indicate sustainable pricing power and attractive unit economics.

Lastly, these companies on the list are not recommendations, but rather starting point that helps investors generate potential investment ideas. You can view our previous screener blog here.

Take Care,

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.