Kevin O'Leary says these are the best assets to own when inflation remains hot — maintain your purchasing power in 2023

Jing Pan
·4 min read
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While inflation has eased slightly in the last few months, it still remains hot.

In December, the Fed raised interest rates by 0.50%, marking its seventh rate hike for the year to slow that worrisome trend.

It’s uncertain how the economy will handle higher interest rates, and stocks are getting sold off as a result.

The S&P 500 plunged 19.4% in 2022.

But investment mogul and Shark Tank star Kevin O’Leary still believes in holding stocks in a rising interest rate environment.

“Even as rates go up, equities are the place to be because fixed income gets hurt a lot more,” he says in a CNBC interview from earlier last year.

Of course, not all stocks are the same. Mr. Wonderful believes in these kinds of companies during times of rampant inflation.

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Companies with pricing power

Against the current backdrop, O’Leary looks for companies that have the ability to raise prices without too much pushback from consumers.

“Where you want to be in equities, particularly when rates start taking up, is in companies that have pricing power,” O’Leary says. “In other words, their goods and services are necessities for people so they are willing to take a small increase in price, sometimes a larger one, as rates go up.”

But where would you find businesses with pricing power?

“Right now healthcare looks really good and also consumer cyclicals look very good,” O’Leary suggests.

He adds that investors should pay attention to companies that produce things people still need during times of inflation, especially “what they eat” and “what they drive.”

Focus on energy

O’Leary singles out the energy sector as a particularly prudent place to park some money during periods of high inflation.

Fuel to power your car, heat your home or cook your food is all more costly. As a result, energy stocks have delivered outsized returns for several months now.

Read more: Your cash is trash: Here are 4 simple ways to protect your money against white-hot inflation (without being a stock market genius)

Even with the recent pullback in oil prices, shares of Big Oil stocks ExxonMobil and ConocoPhillips are up roughly 63% and 55%, respectively, over the past 12 months.

Technology stocks, on the other hand, aren’t doing so well these days. The tech-heavy Nasdaq tumbled 33.1% in 2022.

O’Leary adds that tech stocks with high P/Es are experiencing extra selling pressure because the Fed’s stance on loose money is changing.

“As interest rates go up, P/Es go down, prices correct on equities.”

O’Leary’s top picks

For long-term investors, holding an ETF that tracks the S&P 500 has been a popular strategy. But O’Leary doesn’t believe in owning a broad-based benchmark index in today’s environment.

His concerns, once again, center around inflation and the Fed.

“Just owning the index could be very risky because lower quality balance sheets like the airlines right now may not perform as well as rates go up because that means their debt servicing goes up as well,” he says.

Instead, O’Leary suggests owning a subset of the S&P 500, such as his flagship fund ALPS O’Shares U.S. Quality Dividend ETF.

O’Leary says owning the ETF is a good inflation-fighting strategy because it's filled with companies that provide products and services that people need.

“It looks for the highest quality balance sheets, companies that are generating cash, companies with high return on assets that do distribution,” he says.

The ETF’s top five holdings are Home Depot, Johnson & Johnson, Microsoft, Pfizer, and Merck.

These companies have been around for a long time. They have survived — and thrived — during periods of high inflation.

They also provide consistently growing dividends over time.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.