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Here are 10 'high conviction' stocks of companies with strong pricing power and 20% upside potential to UBS targets

Tomi Kilgore

UBS expects pricing power to be even more important as shipping, raw materials and wage costs surge

Inflation and supply issues are among the buzziest words on Wall Street as the third-quarter earnings reporting season approaches, with investors waiting to see which companies were the best at managing surging cost pressures and shipping disruptions.

UBS strategists believe one of the best ways to deal with these headwinds is for a company to raise prices, but not all companies can do so by enough to make a real difference without losing customers.

A number of companies in different sectors have already cut forward guidance, given rising costs and supply-chain disruptions, such as FedEx Corp. (FDX), Nu Skin Enterprises Inc. (NUS) and Dollar Tree Inc. (DLTR)

Third-quarter earnings season kicks off in earnest next week, with aggregate earnings per share of the S&P 500 companies expected to show year-over-year growth in earnings per share of about 27% and in sales of about 15%.

Also read: Investors are paying up for stocks where company profit resists squeeze from inflation, says strategist.

Read more: Stocks will be volatile until they can prove their inflation resilience, these strategists say.

"Pricing power should be an even more important theme for relative returns with surging shipping costs, rising raw materials, supply chain issues and accelerating wage growth," UBS strategists wrote in a note to clients this week.

So the strategists, led by Keith Parker, asked UBS analysts across 33 industries to identify companies with the strongest relative pricing power. The analysts were also asked to pick out companies that scored in the top third of their respective sectors based on UBS Equity Strategy's composite score for pricing power, margin momentum and input cost exposure; have "buy" ratings; and have stocks with at least 10% upside potential to their respective price targets.

Here are 10 "high conviction, strong pricing power stocks" on UBS's list that have about 20% upside to the analysts' stock price targets, in alphabetical order:

"The auto parts sector traditionally has strong pricing power, with an ability to pass along price increases to customers," Lasser wrote. "Plus, AAP also have the largest exposure to the commercial segment of the market, which is viewed even more favorably."

"End-market demand has been improving year-over-year, leading to elevated 'wait times' despite increased product procurement/production," Vogt wrote. Regarding the BEV market, Vogt said that while Apple isn't a first mover, "its significant resources should enable the company to be a 'fast follower,'" similar to when it entered the smartphone market in 2007.

"As primarily a U.S. futures business, CME enjoys the highest barriers of entry in the space," Kramm wrote.

"DHR sales engine is able to proactively identify areas of potential pricing pressure and [successfully] navigate customers to high-value product," Sourbeer wrote.

"Pricing power in commodity companies is difficult to achieve. Those that can hold margins by best controlling costs, though, are better positioned," Byrne wrote. "EOG is better positioned than most by being proactive with input and service costs, while excelling in operations."

"Strong demand for self storage and elevated occupancy rates, combined with its non-discretionary nature increased pricing power of the operators," Goldsmith wrote. "Operators are flexing their pricing power to new customers, as well as existing customer rent increases every 9-12 months."

"Dominant market share (80%) and strong demand for home standby power have insulated already high residential product margins," Windham wrote.

"We believe the market doesn't fully appreciate how Nike's investments in product innovation, supply chain and e-commerce are working in concert to drive unit growth and [average selling price] increases," Sole wrote.

"Importantly, the drivers behind the improved margin outlook strike us as sustainable, with topline outperformance, a permanent shift towards WFH [work from home] and Zoom-based customer interactions, and renewed expense discipline internally...the three biggest drivers," Keirstead wrote.

Taylor said he believes margins can go "significantly higher" over the long term, given the company's leverage to both necessary and elective procedures, which should return quickly in a post-pandemic world.

-Tomi Kilgore


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10-07-21 0818ET

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