Everybody's raising prices. It feels that way, doesn't it? There isn't a company I follow that doesn't seem to be putting through price increases and they all seem to be sticking.
There's only one problem: the vast majority of times we feel totally ripped off when it happens, We are angry and we can't believe the gall of these companies that jam us with their greed. Their greed can translate into higher prices for their stocks, but it might be pyrrhic because too many price increases can spur a move from the Federal Reserve to raise rates. That can crush the whole market and is something that has helped push this market down for days now. The hated price increases erode purchasing power and make it so if the Fed doesn't do something everybody ends up losing. You don't need a weatherman to know which way that wind blows for stocks. The wind's been blowing south for days in part because you aren't the only one who is fed up with the price increases. So's the Fed. The only difference is that the Fed can do something about it.
But there are a handful of companies that we are willing to pay more for, and do so without much resistance at all. Those are companies that, for the most part, have stocks that I want to own. These are the ones that will have rising gross margins, because it doesn't cost them any more to make what they are selling but they are selling it for more than they did the day before the increase.
Today we got a perfect example of what I am talking about: Microsoft (MSFT) raised the price of Office 365 for the first time in a decade. The price increases are minimal but with 300 million users the money will add up and add up quickly. Plus, nobody will complain because it's enterprise and unless you are the gnome who does the purchasing, you probably don't care one whit. Microsoft has added so many features since it first offered the product in 2011 that it actually seems like a bargain, even if you wish you had Apple (AAPL) and probably have Apple at home.
That price increase spurred Microsoft's stock to go to an all time high of $296 with a market capitalization of $2.2 trillion, which is close to another company that can put through painless price increases Apple, with a market capitalization of $2.4 trillion.
Microsoft in itself is a lesson of this market. We keep hearing that we haven't had a 5% correction in more than 10 months. One of the reasons why we haven't is because of the stock of Microsoft. This one has been the unsung hero of this entire bull market, especially this most recent phase. It quietly goes about its business not ever being in the crosshairs of the government, any government. Have you ever heard them mentioned in the same breath as Facebook (FB) , Amazon (AMZN) , Alphabet (GOOGL) , or Apple, even as I would argue that one of the reasons why they can put through this price increase is that we, the Wintel users/prisoners have no choice, do we? But no one is going to investigate these guys for monopolistic practices. The government did that successfully 20 years ago and since then Microsoft has worn the theoretical white hat.
Who else could put through a price increase and it wouldn't matter? How about the only company bigger than Microsoft, Apple.
How do I know that we are willing to pay for price increases from Apple? Because if you get a phone from a provider they absorb the price increase not you. Again, another stock I want to own because they have a product that I don't care about pricing.
Does Apple immunize us from a correction if its stock stays up here? It is hard to have a giant decline without the help of Apple's stock going down. I do think, however, that the price insensitivity of Apple - the thirst we have for their new phone without having to pay for it, at least in an overt way, makes it all so palatable.
It's not just the price of the phone that we are inured to. How many services have you bought from Apple in the last six months. How many purchases have you made from the App store? Again we are talking about painless services that could all go up and we would not even notice because these seem like relative bargains. Unlike most price increases, for instance anything in the supermarket, you just don't hear all that much grousing about paying more for something from Apple. That's a big reason why it, too, is so near its 52 week high. The lack of recognition or faux praise that Apple gets from analysts has more to do with the fact that the analysts can't understand the value proposition of this consumer tech giant. They are much more comfortable raising numbers for Microsoft on an Office 365 price increase than they are pushing the stock of Apple because of customer satisfaction.
Who else can get away with a price increase right now at this very moment and no one would think it extravagant? How about Costco (COST) ? When we went to see them two years ago I was struck not by how much they charge but how little they charge. They want you in, they want you as members, and that's why you can get Caymus there for less than you can get it anywhere else, perhaps less than Caymus sells it for. I have had a lot of businesses, some good, some bad but one of my nuttiest was a popcorn company. We had had a deal with Costco where we chose to lose money in order to make it up on the back end. Not that there was one.
But that's why you would be willing to pay more to be a member. Even better, I have no idea how much it costs to be a member. I know something better: whatever it costs it's a real bargain for what I can get. Hmm, is it any wonder that Costco, now, quietly a $200 billion company, had a stock that just hit an all-time high?
If you use this analysis, the analysis of a company that offers you a bargain that you would pay more for, or that you aren't even aware of what you pay, that leads you to Netflix (NFLX) . Now this is a forgotten stock and I am beginning to believe that it is going to be unforgotten now that the company can make new productions free of COVID, or at least relatively free because of the breakthroughs.
The stock of Netflix does trade on hits. That last quarterly conference call was joyless - very unlike Netflix - because there weren't any new productions they could rave about. No Ted Lasso's so to speak, to name another Apple product that I will pay more for. This next one will, I think, give us a better quarter precisely because the bargain will be self-evident one more time.
Finally, one more that is now hated and I think hated unfairly: Amazon's (AMZN) stock is now down 2% for the year as it is viewed as a company that we would only pay more for when we are in lockdown. I think that's a poor judgment. We will eventually start realizing that we like Amazon because Prime is such a bargain, not because we are now willing to go to Macy's (M) or Kohl's (KSS) , two standouts in today's session. Prime crosses from being a pandemic play. It's a play on our instincts to want to get more for less. That's Amazon, and that's why it, too is a buy.
So when you think of what's working ask yourself if you would be sensitive to a price increase or not. The ones you are not? Go buy their stocks.