Why you should hedge against US inflation uptick

The prevailing Wall Street view since the Fed's March meeting that there is no inflation threat could be wrong. So now is the time to pick up a few 'inflation hedges'. These are the tips from the US press.

Taken together, higher bond yields, and stock and commodity prices indicate an acceleration in global growth or inflation or both, says Jack Lavery on Barrons.com. This in turn means that the prevailing Wall Street view of Federal Reserve interest-rate hikes of "one and done" may be wrong. And that, says Michael Englund on Businessweek.com, leaves the "Goldilocks economy" (so called because growth is "just right") facing a "dangerous trio" of inflation, a falling dollar and slowing growth.

 

In particular, headline inflation despite its recent "plateau" within the Fed's comfort zone is now facing a "clear risk of a renewed uptrend". On top of that, headline inflation, as measured by the personal consumption expenditure (PCE) index, has "registered some particularly large gains over the last five quarters of 2.6% to 3.5%". The trend in these figures is "clearly upward". Yet within the spectrum of inflation fears, says Jim Jubak on Money.uk.msn.com, the pendulum of market sentiment has been firmly jammed towards the "no inflation worry" since the release of the minutes of the Fed's March meeting. If you haven't already done so, it's a good time to pick up a few "inflation hedges".

 

Grant Prideco (GRP, $51.64) is a case in point. It sells "cutting-edge drill bit and drill-pipe technology products to oil drillers". The firm's earnings are forecast to rise 66% this year, to $2.88 a share according to Yahoo, followed by 24% the year after, putting it on a forward p/e multiple to December 2007 of just 14.5 times and a price to earnings growth (PEG) ratio of well under one.

 

Portfolio Recovery Associates (PRAA, $51.44) makes money buying bad debt that other firms "have given up on collecting" and then collecting it. According to Yahoo, it is trading on a forward multiple of only 16.3 times and is also on a PEG of under one.

 

More broadly, says Michael Kaye, also on Businessweek.com, eight other potential investment targets are: BHP Billiton (BHP, $45.30); Chicago Mercantile Exchange (CME, $460.94); Coach (COH, $33.00); ITT Educational Services (ESI, $63.64); Hydril (HYDL, $81.00); Interactive Data (IDC, $22.15); Moody's (MCO, $61.97); and Quality Systems (QSII, $33.57).

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