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The latest data from both the UK and US indicates that inflation is going to be one of the key themes of 2025. And that means investors looking at growth stocks need to think carefully.
Some businesses are more resistant to the effect of higher prices than others. And in general, those are the companies that are able to differentiate themselves from their competitors.
Differentiated distribution
FTSE 100 industrial conglomerate Diploma (LSE:DPLM) offers a service its customers can’t get anywhere else. It combines the benefits of a huge scale with close attention to individual customer needs.
One of the company’s big points of differentiation is the size of its inventory. When its customers need a part for a machine, it’s typically urgent and Diploma gives them the best chance of finding it in a hurry.
Providing a service customers can’t get elsewhere is a good thing when it comes to fending off the effects of inflation. But there are risks investors should consider.
One is the potential of inflation gives way to an economic downturn if interest rates rise. That could cause the rate of sales growth to slow, which is already happening to some extent.
Diploma annual revenue growth 2020-2024
Created at TradingView
The risk for investors is exaggerated by the fact Diploma’s shares reflect an optimistic outlook in terms of growth. But the company’s ability to offer a unique service to its customers is still intact.
This is what gives it the ability to weather an inflationary environment. And while this remains intact, I think the stock could still be one to consider buying.
Brand power
From the FTSE 250, AG Barr (LSE:BAG) has a small-but-mighty brand portfolio that might well give it scope to pass on the effect of higher prices. Irn Bru is a good example of this.
With a few exceptions – mostly in the US – soft drinks firms aren’t known for their growth prospects. But the company has been acquisitive in recent years and revenue has been growing strongly as a result.
AG Barr total revenue 2015-2024
Created at TradingView
So far, though, the company hasn’t fully realised the potential synergies from its acquisition of BOOST a couple of years ago. Operating margins have thus been lower in the last couple of years.
AG Barr operating margin 2015-2024
Created at TradingView
That’s where the next wave of growth comes from for AG Barr. And I’m optimistic that the resilience of Irn Bru in its core market will allow the company to offset the effects of inflation.
A potential risk for the business is the rise of anti-obesity drugs. These have the potential to dampen people’s enjoyment of these kinds of drinks, which could potentially dampen demand.
I suspect, though, that the market is underestimating AG Barr’s ability to raise prices to offset a gradual decline in demand. With the stock falling back to £6, I think investors should consider buying.
Inflation again
Warren Buffett says that the best investment someone can make against inflation is in their own skills. And the second-best is owning stock in an outstanding business.
Whether inflation is 2% or 10%, companies that are able to grow their earnings to offset this will typically fare better than those that aren’t. And that makes growth stocks important heading into 2025.
