A tight labor market threatens to keep inflation elevated, which could mean high rates for longer. In such an environment, pricing power is crucial to a firm’s success, says Kevin Dreyer. The Gabelli Funds co-CIO is bullish on stocks like Diageo and BellRing Brands. The folks at Gabelli Funds are bottom-up investors, says Kevin Dreyer, a co-chief investment officer for value investing at the $29 billion firm founded by Mario Gabelli.
That means they look for stocks that are fundamentally sound, have quality earnings and profit margins, and have secular growth tailwinds based on market demand.
One of the qualities that makes a company attractive to them is strong pricing power: being able to hold prices steady in tough times or even raise them as inflation surges. This allows firms to protect their margins.
As the labor market remains tight and consumers continue spending, inflation is at risk of remaining sticky. That would mean high rates over a longer period of time, raising the risk of an economic downturn. With both threats looming, Dreyer believes the companies his firm focuses on are well-positioned to thrive in either environment.
In a recent call with Insider, he shared three names he’s particularly bullish on. Gabelli funds invests in stocks with a target timeline of around five years.
3 stocks with pricing powerOne name he likes is Diageo (DEO), a British alcohol producer. The company owns popular brands like Bulleit, Casamigos, Guinness, Captain Morgan, Don Julio, Baileys, Johnnie Walker, and more.
He thinks the company will benefit from a shift to tequilas and higher-end bourbons. Over a multi-year timeline, he also thinks they’ll get a boost from higher tequila consumption outside of North and South America, as well as increased consumption of scotch elsewhere. Last year, India overtook France as the largest market by volume, according to the Scotch Whiskey Association.
“I can tell you with a lot of confidence that 5-10 years from now there’s going to be a lot more scotch consumption in India,” Dreyer said. “And they’re going to be drinking more premium scotches.”
Another name Dreyer talked about was Treehouse Foods (THS), a food and beverage producer.
He said their narrow focus on the coffee and snack food spaces will drive their success. The firm just bought a coffee facility that will allow it to scale up production, he said.
“I don’t tend to think of private label firms as having the best pricing power out there, but that said, what Treehouse has done is pretty unique,” he said. “They really picked these two spots where they think they can win.”
The third firm Dreyer talked about was BellRing Brands (BRBR), which owns protein snack brands like PowerBar and Premier Protein.
He pointed to higher sales numbers recently, as well as increased production capacity to meet demand.
“They just added a bunch of capacity, sales were up 20% in the last quarter, and now they’ve added 20% capacity for their next fiscal year,” Dreyer said.
Protein prices are also coming down, he said, which will help boost the firm’s profit margins. He said this would allow the firm to commit more money to promoting their products.
“They haven’t even advertised really yet at all,” he said.
Dreyer also thinks they’re a good candidate to be acquired by a larger firm at a premium. The stock currently trades near $39 a share, but he believes that would go to $60 in the case of an acquisition. That would be a jump of 53%.