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3 Categories to Hedge Inflation

With a new round of aggressive money printing around the globe, the inflation risk is inevitably on the rise. However, this by no means would lead to a notable price increase soon, either this year or the next three years. We at Urbem think it quite impossible to accurately predict when this monster risk will materialize.

However, it is never too early for investors to position well to protect the real value of assets. There is no doubt that stocks provide the best long-term inflation-adjusted results for investors. The question is which businesses (if any) offer the best hedge against price increases and devaluation of fiat currencies. We have come up with the following picks in answer to this question, with their robust inflation-hedged business models and/or pricing power.


Hard Assets - Texas Pacific Land Trust

The land is a natural inflation hedge, and what can make the soil more valuable is the resources underneath it. This is precisely what Texas Pacific Land Trust (NYSE:TPL) provides for its owners - the oil and gas under more than 450,000 acres of land in western Texas as well as the perpetual royalty interest.

If the value of the dollar decreases, the price of the black gold can rise, benefiting the Trust's royalty business. The cash flows here are mostly no-CapEx, no-OpEx, repeatable and of high quality, leading to reliable downside protection even in the case of permanently low oil/gas prices. It is worth mentioning that the Trust is being converted to a C-corp, hopefully making its corporate governance sounder.

Payment Business - MasterCard, Visa, PayPal, Square

Payment businesses typically employ a dollar-volume-based sales model, which enables them to charge more if consumers spend more. As a result, companies like MasterCard (NYSE:MA), Visa (NYSE:V), PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) would theoretically earn more revenue based on higher prices in the transactions that they process. What is even more significant is that many of the players in the space are highly scalable, meaning that any incremental revenue would far exceed the corresponding additional cost. Take a look at the steady margin expansions at MasterCard and Visa below.

Unique Intangible Assets - Hermes and Ferrari

Last but not least, we think that highly-sought-after but rare assets should also perform well for their owners during periods of high inflation. Evidently, iconic brands like Hermes (XPAR:RMS) and Ferrari (NYSE:RACE) own top mindshare over their target customers, the ultra-high-net-worth individuals, which usually suffer less during an inflationary environment. As is indicated below, both European luxury goods companies maintain super-normal gross profitability andhave managed to increase their margins, demonstrating the ability to raise prices faster than the increase in costs. For instance, if Hermes were to make a product for $3, it could significantly market up and sell the product for nearly $10. What substantial pricing power!

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Hermes, MasterCard, and Texas Pacific Land Trust.

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This article first appeared on GuruFocus.