5 Stocks That Beat Inflation

It might sound premature to worry about rising prices when inflation and demand for cars, copper and nearly everything else are at their lowest levels in years. Yet a small but growing number of investment pros are betting inflation will return much faster than the conventional wisdom anticipates, and when it does, it will be far more widespread and potent than we’ve seen in years. So they’ve been quietly buying shares of companies—some obvious, some unexpected—that stand to benefit.

Of course, the strategy has some risks. The stock market, in general, could be bumpy for some time. And there’s no guarantee inflation will be back soon, especially if the recession lingers or the economy slips into a depression. The International Monetary Fund, which lends money to countries in distress, says the U.S. faces a moderate risk of deflation, or falling prices. Still, the inflation hawks have history on their side. Since 1945, prices of goods and services have risen, on average, 12 percent within two years after a recession ends. The jump in prices that comes along with an economic recovery is called reflation, and that move often benefits materials, energy and technology firms, says Nicholas Bohnsack, a sector strategist at Strategas Research Partners. Indeed, there are some signs that the U.S. economy’s free fall is over and the beginnings of a revival might not be too far away.

The trillions of dollars governments around the world are pouring into the global economy, whether it’s in the form of stimulus packages, bank rescue deals or other efforts, will make prices go only higher, many analysts contend. A lot of those nations are already running some eye-opening deficits (Japan’s $127 billion, the U.S.’s $1.2 trillion and counting). So they have to print more money without enough assets to back it up, which some believe will devalue their currencies and bring on higher inflation. This is not news to our leaders, of course. But to keep inflation at bay, the Feds probably will have to dramatically raise taxes or drastically curb spending, neither of which seems likely. Bond investors, at least, feel inflation is a worry. In early June, the yield of the U.S. 10-year Treasury bond briefly touched 4 percent, its highest yield since October, because some investors are worried about the amount of debt the U.S. government already has issued and potentially could issue over the next several months.

The advantage of betting on inflation now, says Ron Holt, president of the asset-management firm Hansberger Global Investors, is that many firms’ share prices are still cheap enough to offer a significant margin of safety. Picking inflation winners, however, isn’t so straightforward. Some companies, like big farm-equipment makers, sold hundreds of millions of dollars worth of products during the recent farm boom, so it’s unlikely many farmers will need a quick replacement even if crop prices rise considerably. We focused on five firms that some pros think will get a boost.