BOSTON (TheStreet) -- A spike in inflation, forecast by economists for well over a year, may arrive in 2011.
For investors, that means avoiding most bonds and steering toward inflation-hedging investments such as gold and energy commodities, coal and oil in particular. Energy stocks are up about 4% this year, second only to financial shares' 5% gain.
Also faring well in periods of accelerating inflation are companies with a strong brand or market dominance. That's because they can pass along higher operating costs to sustain profits while retaining customers. Going big is good, and an industry leader is even better.
Inflation was a benign 1.5% last year, down from 2009's 2.7% increase in the Consumer Price Index, the government's main inflation gauge. And the latest government figures for 2010, issued Jan. 14, show only modest increases in energy, housing and medical costs, so overall inflation remains low.
But higher prices for food, oil and other commodities are starting to stoke inflation in Europe, so it may be only a matter of time before it kicks in at home in the U.S. On Tuesday, data from the U.K's Office for National Statistics showed annual consumer-price inflation jumped to 3.7% in December from 3.3% a month earlier.
In the U.S., all one has to do is fill up the tank at the local service station to understand that commodity prices are rising. Gas prices nationwide are already averaging over $3 per gallon and are near record prices for this time of year.
The recent surge in crude oil prices to nearly $100 a barrel on supply issues after the Alaska Pipeline shut down for emergency repairs has raised the specter that gas could hit $4 or more by the peak summer driving season.
And that could curtail consumer spending as well as costs for a wide range of industries with a big exposure to transportation costs. That said, the following pages review which companies may benefit the most from quickening inflation.
is one of the surest bets in the gold sector. As the world's largest producer, it benefited from the 25% appreciation in gold prices in 2010.
Adding to its golden prospects, Barrick was expected to increase production by 6% in 2010, while at the same time initiating a program to rein in operating costs.
Barrick's mines are in countries with little political upheaval and are therefore less likely to suffer production slowdowns. A Morningstar analyst notes that 34% of Barrick's production was from the U.S. in 2009, so "a good chunk of Barrick's operations aren't subject to an unfavorable price/cost equation shift whenever the U.S. dollar depreciates and gold prices rise."
Barrick reported third-quarter net income rose 75% to $829 million, or 84 cents per share, and that operating cash flow rose 40% to $1.28 billion in the period.
It's the top pick of the $1.3 billion
American Century Global Gold Fund
Barrick's shares are down 12% this year after gaining 36% in 2010. The benchmark
S&P 500 Index
is up 2.8%.
In the oil sector,
is an old reliable as the world's largest oil and gas producer, with huge untapped reserves. It's also one of the world's biggest specialty-chemicals manufacturers.
Given its geographic and product diversity and cost consciousness, Exxon can weather a downturn in commodity prices with ease and surely will ride a boost in demand and higher crude oil prices to big gains in the event of inflation.
Shares are up 6.5% this year after gaining 10% in 2010. Exxon, with a market value of $392 billion, has been good to its shareholders, as over the past five years it paid $39 billion in dividends and repurchased $135 billion worth of stock, reducing shares outstanding by 23%.
Standard & Poor's has a "strong buy" recommendation on Exxon shares. The company recently raised its earnings outlook by 21 cents to $6 per share for 2010, and by 25 cents to $6.60 for this year. It also increased its target price by $6 to $85.
is one of the oldest and largest coal miners in the U.S. and stands to benefit from a recent shortage of metallurgical coal due, in part, to flooding in Australia, the world's biggest producer of the specialty coal used in making steel. Consol is one of the leading U.S. producers of the specialty coal, thanks to its operations in Appalachia.
Consol is also one of the most efficient U.S. miners, but it may face political headwinds as recent mining disasters are expected to prompt the government to impose strict guidelines on the industry, which may slow production.
Consol shares are up 6% this year after gaining 77% in 2010. Coal-sector stocks gained an average of 39% last year versus the 15% return of the S&P 500.
Indicative of its solid outlook, analysts give Consol shares 12 "buy" ratings, three "outperforms," three "holds," one "underperform" and two "sells," according to FactSet.
, one of the world's largest retailers, is another top selection for investors seeking to outfox inflation. That's because the company can pass on most of the price increases from suppliers and yet retain cost-conscious customers.
"Its competitive advantages generate positive economic returns and a wide economic moat, a rarity in retail," said a Morningstar analyst in a recent research note.
And that's the perfect formula for succeeding in a period of inflation coming out of a recession.
It's also rapidly enlarging its international footprint, buying into Brazil most recently with a controlling stake in one of the country's largest retailers, and building out in China and other emerging markets.
Wal-Mart shares are up 1.6% this year after losing 3% in 2010.
Standard & Poor's analysts give Wal-Mart a "strong buy" rating, saying they expect revenue to grow 5.6% in fiscal 2012, up from its estimate of $425 billion for fiscal 2011. Their expectations are for 12% growth in international sales and 4% more store space as key drivers.
"We expect U.S. same-store sales to rise 1%, reflecting the pass-through of product-cost inflation and more stable consumer demand."
Analysts are relatively bullish on Wal-Mart shares, giving them 14 "buy" ratings, eight "buys/holds," eight "holds" and one "weak/hold," according to Standard & Poor's.
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