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We know which stocks will win if commodity prices plunge. Just look at the winners during the sell-off in everything from oil to copper in July and August. When the price of crude oil fell on Aug. 22, Continental Airlines' (CAL, news, msgs) stock climbed 10.6% and shares of JB Hunt Transport Services (JBHT, news, msgs) rose 4.8%. Nothing like a drop in oil to make heavy fuel users such as airlines and truckers soar.
And we know which stocks will win if commodity prices resume their rocketlike trajectory of the first half of 2008. When the price of crude oil rallied on Aug. 20 and 21, Devon Energy (DVN, news, msgs) jumped 10.3% and Freeport McMoRan Copper & Gold (FCX, news, msgs) shares climbed 10.6%. Nothing like a jump in oil to make oil stocks pop, along with inflation hedges like copper and gold.
But what if, despite the market's nearly daily swings recently from commodity doom to commodity boom, the future belongs to neither of these either/or scenarios? What if we're looking at neither a commodity collapse nor a resumption of the commodity rocket but instead a period of slower, more moderate increases in commodity prices? In other words, a world where oil and iron ore prices climb 20% in a year instead of the 80% or so we saw from mid-2007 to mid-2008?
The power of pricing
Then I think we're looking at a very different group of winners -- one that's pretty much off everyone's radar right now. Which, of course, raises the possibility that these stocks could actually deliver a profit to investors over the next six to 12 months. That possibility is enough to get my attention. After all, there isn't much of anything going up now that the bear market looks like it's resumed its hold on stocks.What are these stocks? The shares of those companies that have the power to raise prices because they are leaders in their sector, with products and brands that customers want even if they have to pay more for them. The same companies that fell behind because commodity prices climbed so quickly that they weren't able to raise their prices quickly enough. A slowdown in the rate of commodity price increases would give these companies a chance to see their price increases catch up with rising costs. And that would produce a jump in profit margins just when everybody is expecting margins to fall further.
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The result? Positive earnings surprises at these companies at a time when nobody else is delivering better-than-expected earnings per share. That's not a guarantee of a climbing stock price in a bear market when investors can sell off both the good and the bad. But it is a chance to own fundamental good news in a stock market and economy in which good news has become increasingly rare.
Let me use the stocks of two companies -- Deere (DE, news, msgs) and Procter & Gamble (PG, news, msgs) -- to show you why companies with pricing power will come out as big winners if the increases in commodity prices slow. I'll finish the column with the names of three other pricing-power companies to research for yourself.
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