As a macro investor, I have had inflation on my mind a lot in the past days. Rising prices were already becoming a risk early last year, but the latest numbers take the cake. With two consecutive months of 5%-plus annual increases in prices, it is clear that inflation will probably be a bigger macro-risk this year than even the coronavirus. Thankfully though, I think this is a challenge that can be met through judicious investing decisions. And one of them could be buying this FTSE 100 stock.
Burberry’s fortunes pick up
The stock I have in mind is the luxury brand Burberry (LSE: BRBY). It has had a bit of a rough journey in the past couple of years, with the exit of its then CEO, Marco Gobbetti, at the height of the pandemic. But it seems that the hardest part is over for the company. In fact, things seem to be looking up for the original trench coat manufacturer. Just this week, it posted a robust trading update and it is also optimistic about full-year profits.
This only adds to my conviction that it could be just the stock for me to buy more of (since I already own it) as inflation rises. There is little doubt that Burberry, like a lot of other FTSE 100 companies, is quite likely facing rising costs. In May last year, it warned about the impact of higher costs on margins. However, in some of its recent updates, I have struggled to find any mention of inflation at all. I find this telling. Clearly, either the company has successfully managed to keep its costs in check, or its sales have seen a robust rise, so it has not really impacted profits. Or both. Whichever way I look at it, the FTSE 100 stock looks well-placed to me.
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Why the FTSE 100 stock is an inflation hedge
This is no surprise, though. I can understand that the company would have been concerned about rising costs one year ago. We were still in lockdowns in many parts of the world and economic uncertainty was significantly higher. So the company was in effect witnessing rising costs at a time when demand could not be forecast to grow sustainably. However, growth has come back and we are going out more, which is creating demand for fashion.
Even with increased demand, it is possible that high-street brands could be impacted by rising inflation. Probably not so for Burberry. As a luxury brand, there can be an aspirational element to wearing its products. In other words, there is likely to be less price sensitivity to its products than that for fast-fashion brands. This ties in with the company’s optimistic outlook on profits for the year.
What I’d do
While Burberry’s products might be pricey, its stock is not. Its price-to-earnings (P/E) ratio is around 16 times, which is lower than that for the average FTSE 100 stock, at 18 times. I am happy to buy around 50 more of its shares for £1,000, especially now, as a hedge against inflation for my portfolio.
