Nervous about stagflation? Buy these 2 growth stocks
With crude oil prices rising sharply in recent weeks and inflation hitting a 40-year high, it’s no wonder people are starting to talk about the prospect of stagflation. In a nutshell, stagflation is an economic disease in which the growth rate of an economy is slow or negative, usually as a result of a supply shock like rising energy prices, while also suffering high inflation (and often high unemployment) at the same time. time. Sound familiar?
While there’s no guarantee the US economy will slide or stay in a state of stagflation, it’s up to you to figure out how to protect your portfolio if it does. In this vein, today I will offer two growth stocks that should be able to avoid the worst of stagflationary impacts, and I will also explain what makes them resilient.
1. Real Estate in Alexandria
Real Estate Alexandria ( ARE -1.54% ) is a real estate investment trust (REIT) exclusively for companies engaged in biomedical research. It buys and builds biomedical lab space and then leases it out to some of the industry’s top competitors, like Modern, Pfizer, and others. And with its total return up 21.1% over the past 12 months versus the market’s rise of 10.8%, it’s definitely a budding growth stock.
Alexandria’s current group of tenants has provided it with $2.1 billion in revenue over the past 12 months, and rent defaults are unlikely due to the fact that many of these tenants are massive businesses and mature. Because its productive capital is real estate, exposure to rising energy prices is minimal, at least for its existing properties. Over the past 10 years, its annual cost of goods sold (COGS) as a percentage of revenue has decreased and its annual free cash flow (FCF) has increased by 230.6%.
More importantly, Alexandria can simply raise the rent if its costs rise for whatever reason, as it currently does on an annual basis for 95% of its tenants. Plus, its tenants have a weighted average remaining lease term of 10.9 years, so they won’t be going anywhere anytime soon. Likewise, the company’s 94% occupancy rate means there is minimal risk that a significant amount of space will go unused, even if poor economic conditions make it difficult to find new tenants. .
In sum, there is no obvious way that stagflation could harm Alexandria’s business.
2. Vertex Pharmaceuticals
Vertex Pharmaceuticals (VRTX -2.25% ) is a drug developer focused on manufacturing therapies for cystic fibrosis (CF) and other inherited diseases. With four cystic fibrosis drugs for sale and a market cap of over $61 billion, the company is by far the biggest and strongest competitor in its niche, and patients don’t necessarily have an alternative.
In the context of stagflation, Vertex has a significant advantage, which it shares with other biopharmaceutical companies. New drugs are expensive to develop, but once they’re ready for market, they don’t cost that much to manufacture per unit. Vertex’s research and development costs represent 40.2% of its annual revenue, but its cost of goods sold represents only 11.9% of its annual revenue.
In other words, bringing in $7.5 billion in 2021 only required spending $904 million on COGS. And regardless of current economic conditions, management expects to realize up to $8.6 billion in revenue from the sale of its drugs this year, so growth remains strong.
While it is true that the price of materials needed to research or manufacture drugs may increase due to rising energy costs or inflation, Vertex has pricing power over its drugs, which may mitigate the impact of both.
Newly marketed drugs are typically priced to help recoup development costs as well as production costs, and the situation in the event of stagflation would be no different. And, its stock can still achieve significant increases from reports of its clinical trial progress, regardless of the economic environment. Raising the prices of older drugs is also an option, although this would be morally dangerous given that CF patients have no other treatment options.
Finally, it is important to remember that some of the company’s key activities are largely insulated from economic conditions. Preparing the regulatory filings to get drugs approved for sale involves labor and administrative costs, but if stagflation leads to high unemployment, it will not be difficult to retain the right staff at an acceptable price. And that’s good for investors looking to hedge against stagflation, to say the least.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.