As the market continues to hit new highs and many companies report better than expected earnings results, investors need to keep an eye on inflation. Multiple indicators point towards higher inflation ahead, which can erode the value of investment returns over time. But some companies can generate higher profits when prices rise.

That’s why we need to pick the right companies in this changing market environment. I suggest companies with higher pricing power. Meaning they have the ability to raise prices faster than their costs. This pricing power can help drive revenue growth and expand profit margins.

To find these companies, all we need to do is take a look at the Nasdaq US Price Setters Index, which includes quality stocks that exhibit growth potential and pricing power. When combined with our proprietary POWR Ratings system, we can unlock Buy-rated stocks such as Lowe’s Companies, Inc. (LOW), O’Reilly Automotive, Inc. (ORLY), and Pool Corporation (POOL) that have the pricing power to thrive in an inflationary landscape.  

Market Commentary

Stocks ended Monday mostly positive as investors were waiting on a slew of earnings and economic releases for the week. The S&P 500 added a new all-time high, while the Nasdaq Composite hit a new record level for the first time since February 12th. The market was flat on Tuesday. Although many companies released first-quarter results and the Federal Reserve’s two-day Federal Open Market Committee started on the day, the news didn’t translate into much market movement.

Stocks finished lower Wednesday as the Federal Reserve kept its monetary policy unchanged. Energy stocks did have a big day, though, as oil prices were up on demand optimism. The market reversed course on Thursday even as bond yields rose. The S&P 500 set a new closing record, and the Nasdaq Composite hit a new intraday high as traders digested the latest batch of earnings and economic data.

The market ended the week lower, ignoring the mostly upbeat earnings and economic data, out of concern for increasing COVID trends, particularly in India. While the economy and corporate earnings look strong, much of this information is likely already reflected in stocks. The consumer-discretionary sector was a bright spot on the day as Amazon (AMZN) posted better-than-expected earnings. Even with the drop today, most major indexes finished the month in the green.

Market Outlook

While economic data continues to be positive and corporate profits look strong, investors are still concerned about inflation, and rightfully so. As the economy gets back on track, consumer demand grows. This drives companies to buy supplies from producers to fill that demand. The producers then raise their prices. In March, for example, producer prices rose 4.2% year over year. This was the largest increase in ten years.

Consumer inflation is also running higher than usual. The Consumer Price Index (CPI) rose 2.6% year over year in March, its highest reading since 2018. This figure is expected to increase in the months ahead. Plus, one-year inflation expectations rose to 3.1%. This is the highest reading since 2014. So investors need to start considering inflation when making investment decisions.

That’s why I recommended companies with strong pricing power. These are companies that can raise the price of their products without impacting demand. In my opinion, the best way to find them is in the Nasdaq US Price Setters Index, which is made up of high-quality stocks with strong growth potential and pricing power. I ran a screen for stocks in the index with a Buy rating in our POWR Ratings system.

After a careful review of each company’s growth catalysts and fundamentals, I narrowed the list to the three below.

Lowe’s Companies, Inc. (LOW)

LOW is one of the world’s leading home improvement retailers, with about 1,970 stores throughout the United States and Canada. The company stores offer products and services for home decorating, maintenance, repair, and remodeling. The company has pricing power as it’s positioned to continue to capitalize on the demand in the home improvement market.

Its products not only appeal to Do-It-Yourselfers but to commercial customers as well. This explains why it has been investing in technology, merchandise category, and strength in its Pro business. LOW’s new total home strategy, which includes providing complete solutions for home repair and improvement, should aid long-term growth.

LOW has an overall grade of B, which translates into a Buy rating in our POWR Ratings service. It has a Sentiment Grade of B, which means it’s well-liked by Wall Street Analysts. Twenty-seven analysts currently have a Strong Buy or Buy rating on the stock. The company also has a Quality Grade of B, indicating a healthy balance sheet. As of the most recent report quarter, LOW had $4.7 billion in cash compared to only $1.1 billion in short-term debt.

The company is also highly efficient, with a return on equity over 400%. We also grade LOW based on Growth, Value, Momentum, and Stability. You can find those grades here. LOW is ranked #10 in the A-rated Home Improvement & Goods industry. You can find other top stocks in the industry by clicking here.

O’Reilly Automotive, Inc. (ORLY)

ORLY is one of the largest sellers of aftermarket automotive parts, tools, and accessories in the United States. The company serves both professional and DIY customers and sells branded as well as its own-label products. ORLY has over 5,000 stores spread across 47 states, in addition to 22 stores in Mexico. The company also provides several services to customers, such as battery diagnostic testing and check engine light code extraction.

As I’ve mentioned before, the used auto industry is currently in a bubble due to delays in new vehicle manufacturing. This has benefited car parts stores as used vehicles require regular maintenance. The company is also poised to benefit from new store openings and distribution centers in highly profitable regions. As used car prices continue to increase, ORLY should be able to raise its prices accordingly.

The company has an overall grade of B or a Buy rating in our POWR Ratings system. It has a Momentum Grade of A as its stock has shown bullish price momentum over the near, mid, and long-term. ORLY also has a Quality Grade of A, which indicates a rock-solid balance sheet. The company has no short-term debt and a return on equity over 1,000.

For the rest of ORLY’s grades (Growth, Value, Stability, and Sentiment), click here. ORLY is ranked #27 in the A-rated Auto Parts industry. For more top-ranked stocks in the industry, click here. 

Pool Corporation (POOL)

POOL distributes swimming pool supplies and related products to approximately 12.0000 customers. This includes pool maintenance products such as chemicals and replacement parts and equipment like packaged pool cleaners, filters, heaters, pumps, and even lights. Its customer base includes both consumers and corporate enterprises.

The stock saw strong momentum last spring as the weather got warmer and more people built their own pools instead of traveling due to the pandemic. The stock should see a repeat this summer as traveling is expected to ramp up due to vaccinations, which will require resorts and other hotels to spend on pool supplies.

POOL has a large market share, enabling it to raise its prices amid increased demand for its products. The company has an overall grade of B, translating into a Buy rating in our POWR Ratings system. It has a Growth Grade of B, as analysts expect earnings to soar 41.3% in the current quarter. POOL also has a Quality Grade of B due to its strong fundamentals. Like LOW and ORLY, POOL has a high return on equity.

The company also has a return on invested capital of 31.9%, which also measures the efficiency. The company has a high current ratio, which indicates it has more than enough liquidity to handle short-term needs. To access the rest of POOL’s grades (Value, Momentum, Stability, and Sentiment), click here. POOL is ranked #20 in the A-rated Athletics & Recreation industry. For more top stocks in this industry, click here.

LOW shares . Year-to-date, LOW has gained 23.06%, versus a 11.98% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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