What are we looking for?
With rising commodity prices pushing the U.S. producer price index above a 5-per-cent year-over-year growth pace, concerns are growing over how much longer U.S. companies will be able to sustain profit margins. Given the rising cost of inputs and the fact that the U.S. labour market is beginning to pick up steam - implying rising labour-cost pressures are in the cards - investors are beginning to shift their attention to the threat these cost pressures will pose to earnings growth in the coming months.
The key, for individual U.S. companies and their stocks, will be their ability to pass the cost increases on to their customers by raising prices - in short, their pricing power. So the question is, which U.S. stocks are exhibiting the greatest capacity to raise prices?
Oppenheimer's pricing-power screen
Brian Belski, chief investment strategist at Oppenheimer Asset Management in New York, recently ran a screen of the stocks on the S&P 500 to determine which stocks have been leading the way in pricing power.
"We found strong relationships between pricing power and relative price and earnings trajectories of many industries," Mr. Belski wrote in his research report.
In his screen, he took increases in gross margin as a proxy for pricing power. (If a company is increasing gross margins, it is essentially improving the gap between cost and selling price.) Looking at the S&P 500 (excluding the financials and utilities sectors, for which, he said, "gross margin is not a meaningful metric"), Mr. Belski screened for companies that had posted an increase in gross margin in each of the past four quarters. He then ranked those companies in order of the biggest percentage increase in gross margin over that period, to come up with his list of pricing-power leaders.
What did we find?
Topping the list is energy services giant Halliburton Co., which has ridden the surge in oil prices (its customers are oil producers) to an increase of nearly 50 per cent in its gross margins over the past year. The list also includes numerous names in the health care and retail-drugs businesses, reflecting the steady upward march of U.S. prescription drug prices over the past six months.
Interestingly, absent from the results entirely were the companies who produce and sell some of the biggest contributors to the upward pressure in costs - the energy, materials and food companies.
Mr. Belski also ran the flip side of this screen - the companies with the biggest declines in gross margin over the past four quarters. We'll look at the results of that analysis Friday.
David Parkinson