Despite regulatory hurdles designed to discourage the practice, some companies control enough of their respective markets that raising prices won't hurt them.
Analysts at Morgan Stanley say that assessing a company's pricing power is one of the cornerstones of bottom-up investment research.
While the consumer pricing index (CPI) rose slightly in January, according to the U.S. Department of Labor, Morgan Stanley's report notes that "core goods prices are largely determined by external developments."
As a result, Morgan Stanley pooled the opinions of its U.S. analysts to identify stocks rated as overweight or equal-weight that the analysts expect to exercise their pricing power in the near term. The firm's team came up with 18 names that "includes health care companies that focus on innovation (e.g., Bristol-Myers (BMY) - Get Report , biotechs), ones that have recurring revenue models with a value proposition that emphasizes location (e.g. telecom towers, Extra Space Storage (EXR) - Get Report , Equinix (EQIX) - Get Report ), ones that possess strong brands in growing categories (Starbucks (SBUX) - Get Report , L Brands (LB) - Get Report ), and some that offer consumables with low demand elasticity (tobacco, Constellation Brands (STZ) - Get Report , Sally Beauty (SBH) - Get Report ).
We decided to pair Morgan Stanley's analyst notes with the technical analysis from our own resident chartist Bruce Kamich.
Kamich pulled the top seven stocks out of the list whose charts show the strongest fundamentals and the most promise.
"The rest of the list is just okay. They might turn out to be buys later, but right now they don't do anything for me," Kamich said of the stocks left off the list.
Media giant Comcast (CMCSA) - Get Report made Kamich's cut. The company made a big move when it purchased NBCUniversal from GE (GE) - Get Report for $16.7 billion in 2013. There were concerns the cable provider's ownership of NBC would create a conflict of interest, but U.S. regulators disagreed with that sentiment when they allowed the purchase to come through.
Morgan Stanley: "For NBCU, we believe Comcast can continue to close the 'monetization gap' between itself and peers, supporting above-average affiliate fee and retrans growth in Cable Networks and Broadcast, respectively. More broadly, we see potential upside to estimates in both Cable and NBCU and think shares can work simply by delivering on consensus estimates alone given the current valuation (~6x Cable EV / fwd. EBITDA). In Cable, we are positive on CMCSA's broadband growth story and see improved results in video given X1. We expect programming cost growth to slow as it exits a content cost bubble by '17E, while capital intensity should fall over time as investments roll off. For NBCU, we see potential upside from the Olympics in '16E and continued momentum in Parks," wrote analyst Benjamin Swinburne.
Kamich: "Shares of CMCSA have largely traded sideways in the past 12 months, basically in a $10 range. More recently CMCSA is getting poised for a move higher," Kamich wrote. "The Moving Average Convergence Divergence (MACD) oscillator is poised to cross lines from below the zero line generating a "cover shorts" buy signal. The 40-week moving average shows a slight downward slope but prices for CMCSA are right on it and could close above it fairly easily."
Constellation Brands has a wide variety of brands that it distributes. The company owns over 100 brands of wine, beer and spirits including Corona, Negra Modelo and Robert Mondavi.
Morgan Stanley: "We believe STZ will exhibit strong pricing power over the next 12 months, but also longer term in its beer business (two-thirds of total profit) for a few key reasons: (i) post a multi-year convergence of STZ price gaps relative to the industry (from a 45% premium in 2010 to a mid-30% premium currently), we believe the company has ample room to increase pricing given market-share momentum across the portfolio supported by greater brand reinvestment and demographic tailwinds," wrote analyst Dara Mohsenian wrote.
Kamich: "This longer-term chart of STZ, above, should make you forget the small "flaws" seen in the short-term chart. You can't miss the strong uptrend here with prices above the rising 40-week moving average. The OBV line is positive on this time frame. Last, we see no bearish divergences between the rising prices and the momentum study. A slowing momentum picture can foreshadow a weaker price picture but that is not an issue on STZ now."
Equinix is a networking company that provides data center offerings. The company's price target was recently upgraded to $345 from $325 by analysts at RBC Capital. Analysts at William Blair also recently upgraded the company's stock to outperform. Morgan Stanley has a price target of $268.
Morgan Stanley: "Equinix operates data centers in premium locations in most global financial hubs; customers need to locate in Equinix facilities to access ecosystems of other financial services, network, and cloud providers," wrote analyst Simon Flannery. "Evidence of this pricing power can be seen in rapid growth in interconnections, which demonstrates the need to be connected in that data center."
Kamich: "Things look pretty good in this chart of EQIX, above, aside from a short-term break below the rising 200-day moving average. The OBV line has been rising the past twelve months telling us that buyers of EQIX have been more aggressive than sellers. The MACD oscillator is positive and poised to move back above the zero line for an outright buy signal."
Philip Morris International (PM) - Get Report has a 39% market share in the EU in 2014. The legacy cigarettes maker has a worldwide market share of 15.6%, excluding China, it has an international market share of 28.6%.
Morgan Stanley: "We believe PM will exhibit pricing power over the next 12 months and have room for continued pricing growth beyond this year. Over the past 12 months, the Global Tobacco industry exhibited improving results following a period of "depressed" growth during 2013-14," said analyst Matthew Grainger. "For PM, we see ample pricing opportunity over the coming years, as its pricing momentum has meaningfully accelerated in 2015. PM's recent commentary during its 4Q15 conference call indicated that the company experienced "strong pricing across all regions" and was a key aspect of its favorable 2016 outlook."
Kamich: "Working on a textbook of chart patterns? Consider this longer-term chart of PM, above, for its great looking base pattern. Prices are just now breaking out above the "neckline" drawn across the $91 level. Notice the two years (yes years) of a rising OBV line. Prices are above the rising 40-week moving average and the MACD oscillator is in a bullish configuration, rising above the zero line."
Fellow cigarette maker Reynolds American (RAI) also made the list of companies that could exercise pricing power in the near term.
Morgan Stanley: "Our recent cigarette affordability deep dive suggests a substantial pricing opportunity in the U.S. US tobacco industry pricing has been meaningfully stronger than expected during the past 12-18 months, increasing 5-7%. In 2016, we expect RAI to continue to realize solid 4%-5% underlying pricing (enhanced further by positive mix associated with Newport)," said analyst Matthew Grainger.
Kamich: "Another great looking and rare in this market environment uptrend on this chart (above) of Reynolds American. Prices are above the rising 50-day and the rising 200-day moving average. The On-Balance (OBV) line has been confirming the higher prices the past year. Volume is higher on days when RAI closes higher. The MACD oscillator is above the zero line and rising -- a bullish set up."
Sally Beauty Holdings is a beauty supply retailer and distributor has a consensus analyst recommendation of Buy from the 16 firms that cover the company.
Morgan Stanley: First, on the cost of good sold side, SBH is seeking better terms from its suppliers. Given that SBH sells a significant portion of private label (50% of products), SBH is seeing success. This started to show in the December-quarter (F1Q) results and should continue throughout the year," said analyst Simeon Gutman. "Second, SBH is raising prices to consumers. Thus far, this has been highly successful and according to the CEO, they are just 5-10% underway. What helps SBH with pricing power is very low average ticket and basket sizes. Typically, baskets are $20-$30 with three to four items."
Kamich: "Overall this longer-term chart of SBH is neutral, but it is turning topside, in my opinion. Prices are above the 40-week moving average but the 40-week average has yet to turn up. The OBV line is in a broad sideways trend but up since November. Last, the MACD oscillator is positive and crossing above the zero line."
Sherwin-Williams (SHW) - Get Report develops paint coatings and related products. The company is one of the leaders in the industry, has a $27.3 billion market cap and is part of Forbes' list of the biggest 2000 companies in the world.
Morgan Stanley: We expect Sherwin-Williams to exhibit pricing power as we continue to move through a period of sustained raw material deflation," said analyst Vincent Andrews. "Sherwin retained price in 2015 so as to drive +280 basis points of incremental gross margin gains, and we expect the company to benefit further in 2016 as the coatings raw material environment remains similarly accommodating. Sherwin's pricing power relates to its control of its own distribution, as well as its outsized leverage to professional painting contractors."
Kamich: "There is a lot of promise in this longer-term chart of SHW. While prices have been edging down in the past year, the OBV line has been going up the past three years! Prices are just now going above the 40-week moving average and the MACD oscillator is going in the right direction to confirm the price strength," wrote Kamich.