Build Your Inflation Hedge With Infrastructure

The lesson from India is simple: The faster a country grows, the more it needs to invest in infrastructure so that growth won't send prices rocketing out of control. Once inflation has reared its ugly head, the need for infrastructure investment becomes even more pressing. It's not an overstatement to say that the faster the growth, the faster the increase in the rate of growth of infrastructure spending.

Economic growth, please note, will not only push up spending on infrastructure at a rate to match the growth in the economy, it will increase the rate of increase in that growth rate as governments try to avoid the kind of inflationary bottlenecks now rocking India.

So how do you diversify your portfolio by adding this kind of anti-inflation hedge? Let me count the ways:

• You can add the shares of companies that make the stuff that goes into roads, ports, airports, etc. One stock that fits this category is Cemex(CX), a global cement producer founded in Mexico in 1906.
• You can add the shares of companies that design and build infrastructure projects. One stock that fits this description is Chicago Bridge and Iron(CBI).
• You can add the shares of the companies that finance this global infrastructure buildup. India, for example, can't afford to pay the bill for its infrastructure needs out of government funds since the country's budget already runs deep in the red. Private investors will have to put up a big part of the cash.

  Macquarie Infrastructure Company Trust(MIC) is one example of a company that invests in and operates infrastructure businesses ranging from airports to bulk storage terminals. The trust is managed by Australia's Macquarie Group, which manages $38 billion in more than 90 infrastructure projects around the world. The shares of the trust pay a 6.3% dividend yield.

New Developments on Past Columns

10 Stocks for the Future: After hitting a high of $56.12 -- about $2 a share above my purchase price -- on Dec. 27, shares of Tejon Ranch(TRC) have moved steadily in just one direction: down. No secret about why. The troubles in the subprime mortgage market have raised fears of a broad-based decline in the real estate market.

And Tejon Ranch's major asset is land, the 250,000 acres the company owns 60 miles north of Los Angeles on Interstate 5. Still, you have to wonder if sellers aren't over-reacting. Permitting (what's called "entitlement") on the two residential communities the company is developing -- Centennial (12,000 acres in Los Angeles County) and Tejon Mountain Village (28,000 acres in Kern County) -- is still 15 to 24 months away.

So land prices are likely to have bottomed and recovered by the time the company actually gets around to selling anything. In the meantime, the 17% selloff from Dec. 27 to March 13 has lowered the price that investors in the stock pay for a developable acre of land from $7,000 to about $5,800. Think that land only 60 miles outside of Los Angles and smack dab on Interstate 5 might be worth a bit more than that per acre?

So hang in. This one will pay off in the long run. As of March 20, 2007, however, I'm lowering my target price to $52 a share by October 2007 from the prior target of $65 by July. (Full disclosure: I own shares of Tejon Ranch in my personal portfolio.)

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Anglo American, BHP Billiton, Goldcorp, Kinross Gold and Tejon Ranch. He did not own short positions in any stock mentioned in this column.

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