Questor: here are four stocks that should perform well if inflation is here to stay

·4 min read
WH Smith shop - Philip Toscano /PA
WH Smith shop - Philip Toscano /PA

Our inflation-busting Wealth Preserver Portfolio is beginning to take shape. We already own three types of asset – gold, the cryptocurrency Bitcoin and some index-linked government bonds – and will today add a fourth: shares.

Prospects for stocks in inflationary times are complex. A little inflation is seen as a good thing, as people have an incentive to spend before their money loses value and companies have cover for raising prices. But runaway inflation is disruptive and destabilising to the economy and to the stock market.

Some shares will do better than others though and we seek to put a proportion of our money – 20pc – into companies that we expect to cope well with mild, moderate or even high inflation by virtue of the inherent stability of demand for their products and their pricing power.

We have chosen eight: all have been tipped here in recent years and we have opted for a small number to avoid the portfolio becoming unwieldy once other assets are added. We have aimed for diversity: some growth stocks, some income, a variety of sectors and business models. We’ll add four shares to the portfolio this time and four more in the next column. Each accounts for 2.5pc of the overall portfolio.

First is Dixons Carphone. When we tipped it in December we pointed out a number of ways in which it seemed mispriced: against the cash due from mobile phone contracts already signed, against expected total cash flows and against the expected value of its Nordic operations, which it plans to list separately. It may seem to lack pricing power but it gets better terms from its suppliers than Amazon.

WH Smith has pricing power by virtue of its near monopoly in the locations it chooses for many shops: stations, airports and hospitals. It has navigated the pandemic with aplomb and has capable management.

Insurers may also seem to lack pricing power but Admiral stands apart by virtue of its entrepreneurial culture, its consistent profits and its high but sustainable yield of 3.7pc, which should support the share price no matter what forces buffet the stock market and the economy.

Our final choice is a growth stock: RWS, the patents firm. Whatever the future for the valuation of tech stocks, technology is sure to continue to play a huge part in our lives and the economy is sure to rely ever more on intellectual property. RWS is a market leader in helping businesses to protect it. It has been well managed through the years and the chairman, Andrew Brode, has a huge incentive to carry on in the same vein thanks to his 23.2pc stake.

Questor says: buy Dixons Carphone, WH Smith, Admiral, RWS

Tickers: DC, SMWH, ADM, RWS

Share prices at close: 127.4p, £17.63, £32.01, 556.5p

Update: index-linked gilts

After our most recent Wealth Preserver column, which advised readers to buy some index-linked gilts or “linkers”, a number got in touch to say that the price their broker wanted to charge was much higher than the one we quoted in our article.

This is not as troubling as it sounds. It is the City’s practice to quote two prices for linkers: one, the so-called “clean” price, strips out the inflation-related uplift; the other (the “dirty” price) includes it and is therefore higher. We quoted a clean price of £147.63 but the “dirty” price for the same bond was about £169.

There is a case for quoting the clean price: it reflects movements in the markets, whereas the dirty price also incorporates the entirely mechanical effect of the inflation link. City traders are more interested in the former, so find the clean price more informative.

But Questor believes that brokers that cater more for private savers should, if they have to choose, quote the dirty price for the simple reason that this is the one you actually pay (or are paid if you are selling). Being shown only the clean price is a bit like going into a shop and seeing everything priced ex-VAT, then having the tax added at the till: a very confusing experience.

Brokers should in this column’s view at least alert private savers to the existence of the two prices. None the less readers who followed our advice need not worry: they may have paid more than our column led them to expect but they will receive correspondingly more when they sell.

Read the latest Questor column on every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.