A co-investment chief at billionaire investor Mario Gabelli’s firm shares 3 stocks with strong pricing power he’s betting on as inflation remains sticky — including one that could surge 53%

• A tight labor market threatens to keep inflation elevated, which could mean high rates for longer.
• In such an environment, pricing power is crucial to a firm’s success, says Kevin Dreyer.
• The Gabelli Funds co-CIO is bullish on stocks like Diageo and BellRing Brands.

According to Kevin Dreyer, co-chief investment officer for value investing at the $29 billion firm founded by Mario Gabelli, the people at Gabelli Funds are bottom-up investors.

That is, they seek stocks with strong fundamentals, high earnings and profit margins, and secular growth tailwinds based on market demand.

Strong pricing power is one of the characteristics that attracts them: the ability to keep prices stable in difficult times or even raise them as inflation rises. This allows businesses to protect their profit margins.

As long as the labor market remains tight and consumers continue to spend, inflation is likely to remain sticky. This would imply higher rates for a longer period of time, increasing the likelihood of an economic downturn. With both threats on the horizon, Dreyer believes the companies on which his firm focuses are well-positioned to thrive in either scenario.

During a recent call with Insider, he revealed three stocks on which he is particularly bullish. Gabelli funds invest in stocks with a five-year time horizon.

3 stocks with pricing power

Diageo (DEO), a British alcohol producer, is one of his favorite names. Bulleit, Casamigos, Guinness, Captain Morgan, Don Julio, Baileys, Johnnie Walker, and other well-known brands are owned by the company.

He believes that switching to tequilas and higher-end bourbons will benefit the company. Over a longer period of time, he believes they will benefit from increased tequila consumption outside of North and South America, as well as increased scotch consumption elsewhere. According to the Scotch Whiskey Association, India surpassed France as the largest market by volume last year.

“I can tell you with certainty that in 5-10 years, there will be a lot more scotch consumption in India,” Dreyer said. “And they’re going to be drinking a lot more premium scotches.”

Treehouse Foods (THS), a food and beverage producer, was another name Dreyer mentioned.

He believes their narrow focus on the coffee and snack food markets will propel them to success. According to him, the company recently purchased a coffee facility that will allow it to increase production.

“I don’t think of private label firms as having the best pricing power out there,” he says, “but what Treehouse has done is pretty unique.” “They really picked these two spots where they think they can win.”

Dreyer also mentioned BellRing Brands (BRBR), which owns protein snack brands such as PowerBar and Premier Protein.

He cited recent increases in sales as well as increased production capacity to meet demand.

“They just added a bunch of capacity, their sales were up 20% in the last quarter, and now they’ve added 20% capacity for their next fiscal year,” Dreyer explained.

Protein prices are also falling, which will help the company’s profit margins, he said. He stated that this would allow the company to devote more resources to product promotion.

“They haven’t even really advertised yet,” he said.

Dreyer also believes they are a good candidate for a premium acquisition by a larger firm. The stock is currently trading near $39 per share, but he believes it will rise to $60 in the event of an acquisition. That would be a 53% increase.