Irish Investing: This Is Not Your Grandfather's Old Sod

Over the past few years, Ireland has garnered the title "Celtic Tiger," as surging growth rates replaced the stereotype of a misty, pastoral land of farmers and Guinness drinkers. Growth is still rocketing in this small country, and some of the mightiest foreign stock performances over the past 12 months are to be found among companies based there.

But recent economic developments may give some investors who want to run with this tiger reason to worry that they might get mauled.

First, though, the bright spots. There are definitely some hot stocks to be found in Ireland: Consider e-business infrastructure company Iona(IONA Quote). It is up a whopping 547% in the past 12 months. It endured a nasty 59% correction with other tech stocks this spring, falling from a high of $101.13 in early March to $41 in late May, but it has rallied, doubling in value since then. It closed at $83.31 on Thursday.

Iona is not an aberration. Pharmaceutical firm Warner Chilcott(WCRX Quote) is up 251% in the past year. Fellow pharmaceutical Elan(ELN Quote) is up 78% over the same period. Most recently, one of the big winners has been Parthus Technologies(PRTH Quote), which makes chips for e-commerce on mobile devices. Its shares have doubled since its initial public offering in May.

Chips, e-commerce, pharmaceuticals -- this is not your grandfather's old sod.

In addition to native powerhouses such as these, Ireland has also managed to bolster its economic fortunes by attracting global tech concerns such as Intel(INTC Quote), which have located factories and R&D facilities there. As a result, economic growth is expected to reach 10% this year.

And considering how small Ireland's economy is, U.S. investors have a surprising number of opportunities to invest there. While there are no Ireland-only mutual funds, there are 17 Irish companies that list in the U.S., through American depositary receipts, or ADRs. In comparison, India, whose population of 1 billion dwarfs Ireland's 3.7 million citizens, has only six companies that list here.

In addition to the tech companies, investors have access to more pure Irish plays, in other words, companies whose prospects are more directly linked to events in Ireland. These would include banks such as the Bank of Ireland(IRE Quote) and Allied Irish Banks(AIB Quote), and local airline Ryanair(RYAAY Quote).

But that's where the bad news comes into play: Concerns are now appearing that the Irish party may be over soon. The government recently reported that inflation jumped a disturbing 6.2% in July over the same month the previous year. Housing inflation is now the highest in the industrialized world. The International Monetary Fund recently delivered a scolding about Ireland's high growth rate, worrying about overheating.

What makes the high inflation rate most troubling for many is that Ireland, which is joined in the euro, has few tools at its disposal to combat inflation since the European Central Bank now sets interest rates. The ECB is more likely to concern itself with inflation in Germany -- which is low -- than in Ireland, which constitutes a tiny fraction of the Eurozone. Indeed, with the ECB's 25 basis point rate hike this week, most analysts are predicting one more 25 basis point hike and that will be it. That won't be enough to halt 6% inflation in Ireland, some fear. (A basis point is 1/100th of a percentage point.)

Or will it? Some don't think the bad economic news are all that bad.

"As far as the economy and inflation, we think the concerns are overdrawn," says Dermot O'Brien, head of economic research at NCB, a Dublin-based financial services firm. Analysts point to three simple factors causing the huge jump in inflation: a recent increase in a tobacco tax, the global rise in oil prices and the weak euro, which has caused prices of imports to soar. Colin Hunt, head of research at Goodbody Stockbrokers in Dublin believes the rate will slide back down to a more manageable 3% by next year.

O'Brien also believes that the economy can sustain its high growth rates for several years, the result of an Irish baby boom now entering the work force, which promises to increase demand and labor supply.

If O'Brien and Hunt are right, then many of the pure Irish plays may look good over the next several months. Concerns about inflation have hit these stocks particularly hard. Bank of Ireland is down 23% this year, and Allied Irish Bank, which Salomon Smith Barney includes in its model European Portfolio, has dropped 21%.

"As inflation improves, I think both banks would have a rather more impressive performance next year than they have this year," Hunt says.

So the party may not be over, and there still may be time to run with the tiger. And there is a consoling thought if it mauls you: Remember, some of the best Irish parties are wakes.