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in this video we will look at what companies are protected from the inflation what companies will do relatively well in the inflationary environment i got this idea from terry smith letter to shareholders of the year 2021 and in this video we will look at the example of a company that is well protected from the inflation it is absolutely free and you will not miss a single new video okay terry smith is a super investor that i follow he's a warren buffett style investor he has a great track record his famous motto is find great companies don't overpay and do nothing s and it is very interesting to see how he selects his stocks also he'bines his letter to shareholders from the last 10 years and in the last letter to shareholders 2021 he brought topic of high inflation right now the inflation is more than seven percent and that is on the conservative side because according to many sources the inflation is much higher so he mentioned two companies one that is well protected from the inflation and the other that is not and in this video we will look at this example terry smith writes the importance of gross margins of the company and the first example is l'oreal in this table we can see that the sales are 100 cost of goods sold are 27 of the sales if we subtract cost of goods sold we get the gross profit so 73 is the gross margin if we subtract sales general and administrative expenses we get the operating profit of 18 so this is the short version of the income statement without added inflation now let's look at the same company but with the inflation of 5 again the revenue is 100 but the cost of goods sold are five percent higher because of the inflation as a result we get the lower gross profit of 72 instead of 73 we subtract sales general and administrative expenses again and now we get the operating profit of 17 which is seven percent lower so the increase of inflation of five percent means the decline in operating profit of seven percent for l'oreal terry smith actually owns l'oreal so this is the example of the company that will do very well in the inflation environment the decline is relatively low only seven percent okay now let's look at another company campbell's again the sales are 100 but now the cost of goods sold are higher 65 as a result the gross profit will be lower 35 for l'oreal it was 73 again if we subtract sales general and administrative expenses we get the operating profit of 15 that is before the added inflation now if we add 5 inflation the cost of goods sold will be 68 instead of 65 percent as a result the gross profit will be 32 instead of 35 percent after subtracting sales general and administrative expenses we get the operating profit of 12 this implies the decline of 22 percent of operating profit so in this case because of the increase in the inflation of 5 percent we get the decrease in operating profit of 22 instead of l'oreal of only 7 so this company is very vulnerable to higher inflation its operating profit will decline much more than l'oreal's so l'oreal will do much better in a high inflation environment than campbell's because of the higher gross margins also when you follow a super investor it is extremely important to know his investment style for example i know that terry smith is a long-only investor as far as i know he doesn't have short position and he's a very long-term investor on 13 f filings there is no cash positions and short positions so that is why it's extremely important to know the investment style also terry smith added a significant position in google and amazon in the recent quarters i have made a separate video on google is button it is absolutely free and
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