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Most analysts “don’t see a big uptick” in inflation coming in 2006, says Joseph Weber on BusinessWeek.com. But most analysts are very often wrong, so if you think you smell the familiar “whiff” of higher prices, you might want to adjust your portfolio accordingly.
Traditionally, hedging against inflation has meant investing in gold and commodities, so one way to do this might be to up the percentage of your assets invested in broad-based natural resources funds or a few of the better value individual stocks in the sector such as Occidental Petroleum (OXY, $92.30), which trades on a p/e of only 8.7 times; XTO Energy (XTO, $46.58, 10.7x); or US Steel (X, $57.35, 10.0x).
However, there is another approach you can take, says Josh Peters on Morningstar.com – own stocks with “pricing power”. You could, for example, buy shares in companies that you think will be able to pass on operating cost increases to their customers. This means pinpointing industries where it is expensive for customers to switch suppliers and where, as a result, those suppliers will be able to both charge a premium price for their products and raise prices easily in the event that inflation takes hold.
A prime example would be Microsoft (MSFT, $27.68, 18.2x, yield 1.3%). Customers may grumble, but how many will really go to all the hassle of switching to another system “just to save a few bucks”?
The same is also true of propane distributors like AmeriGas (APU, $30.69, 16.0x, 7.4%) and Suburban Propane (SPH, $29.98, 15.1x, 8.7%). These firms own their customers’ gas tanks, so a change in supplier means a change of tank, something most customers won’t want to be bothered with.
Alternatively, you could buy companies whose dividend growth can be expected to accelerate in an inflationary environment, such as those that operate under a “price cap” regulatory system – ie, their rates are indexed to the Producer Price Index, so that when inflation rises, “so will rates, revenue, and payouts to investors”. Examples of this kind of stock are pipeline companies such as Kinder Morgan (KMP, $48.16, 19.7x, 6.5%) and Teppco Partners (TPP, $36.80, 19.3x, 7.3%).
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Charlie Gibson
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