It’s the middle of the Summer, and it’s beginning to look like inflation might heat up again.
On Tuesday, the U.S. concluded yet another round of bombing in Iran, which was met by retaliatory strikes from the latter party. Apparently, this was all kicked off when Iran attacked commercial ships in the Strait of Hormuz, indicating that the closure of the Strait, as agreed on in a memorandum of understanding (MOU) had ended.
This development, of course, raises the spectre of elevated inflation. And while betting on war and inflation may not be the nicest thing to do, it’s certainly prudent to invest in stocks that can thrive when prices are rising. In this article, I’ll share one stock that I’d consider buying before inflation heats up
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Alimentation Couche-Tard
Alimentation Couche-Tard Inc (TSX:ATD) is a Canadian stock with the potential to make money in a high-inflation environment. First and foremost, it’s a fuel company, which means that it can make money amid elevated fuel prices. Despite the general practice of gas stations running fuel sales as “loss leaders” to get people in the doors to buy consumables, ATD is able to actually make money off its fuel sales! This is because it actually owns a large portion of its fuel supply chain. It actually buys fuel and sells it to the consumer at a slight markup, a fact that enabled the company to recently have 51.5% of its gross profit in fuel sales last year! So, the higher fuel prices go, the more money ATD makes.
Diversified operations
That’s not to say that ATD is just a fuel seller, though. Far from it. Like most other gas stations, it’s also a vendor of various consumable products: beer (in some provinces), cigarettes, lottery tickets, and more. The companies that sell these products are often strong brands with “pricing power” (the ability to raise prices in times of inflation). The products themselves also tend to do well during recessions. While I can’t say for sure that ATD sees an increase in its own cut when its suppliers raise their prices, I’d imagine its margin on such sales stays the same. If so, then ATD has some inflation resistance both inside its stores and outside of them.
A great growth strategy
One of Alimentation Couche-Tard’s secrets of success over the last few decades has been its approach to growth and expansion. Although the company has expanded aggressively, buying up chains in the U.S. and elsewhere, it has always financed its expansion with retained earnings and minor debt, as opposed to copious amounts of debt. This has resulted in a rather low dividend yield, but also a strong balance sheet, with ATD having relatively little debt relative to equity.
Foolish takeaway
The bottom line on Alimentation Couche-Tard is that it’s a company which is resistant to inflation in many ways. It sells – and makes real profit from! – fuel. It sells consumable goods that tend to sell well all the time, especially in recessions. Finally, its management seems sensible, having executed a smart growth strategy over the decades. Overall, I would be happy to have Alimentation Couche-Tard in my portfolio.
