Slow-Growth Stocks With Inflation Hedge

Investing in slow-growth industries while hedging against inflation creates a winning porfolio, a certified financial planner says.
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BOSTON (TheStreet) -- Visa(V) - Get Report, Kinder Morgan (KMP) and Duke Energy(DUK) - Get Report aren't the sexiest stocks, but they enable investors to diversify through slow-growth industries, says Larry Rosenthal, president of Financial Planning Services.

Rosenthal, a certified financial planner in Manassas, Va., says such a strategy generates yields that outpace those of Treasuries. At the same time, a basket of those types of stocks should provide growth potential and an inflation hedge.

Larry Rosenthal, president of Financial Planning Services.

"The main fight that the small retail investor has is keeping their money growing to outpace both taxes and inflation," says Rosenthal, whose firm oversees about $200 million. "If the economy expands and the market grows, it will create jobs and spur spending. With the position of monetary policy, we're going to have inflation again. That's where our hedging comes in, by betting on commodity-related stocks."

His all-equity approach looks to dividend stocks whose yields are sustainable over a 12-month range and favorable compared with the 10-year Treasury, which currently yields 2.47%. To hedge inflation, Rosenthal says stocks require a three- to five-year time horizon.

"If we do have a double dip, it will be a wonderful cushion for us in these holdings," Rosenthal says. "The

Federal Reserve

has basically said if the economy pulls back, they're ready with some more easing measures. That's an even better argument for some of our longer-term inflation hedges. We do think inflation is going to come. We just don't know when and by how much."

When picking stocks for a portfolio, Rosenthal partners with Richard Krafcik, a fund manager at Stack Financial Group. Krafcik says he seeks out companies with wider margins than their competitors, which is an advantage if the economy weakens because they are better able to cut prices and sustain revenue growth.

The all-equity approach has its share of risks, as stocks tend to be more volatile than bonds. Still, the portfolio has a lower beta than the S&P 500 -- it doesn't move in lock-step with the benchmark -- with a yield that outperforms Treasuries.

Rosenthal also notes that while he likes the diversification across industries that this type of approach involves, it should only be one component of an overall portfolio. "Because we have a good amount of emerging markets and bonds in our portfolio, we try to get a blended mix," he says.

Despite those risks, Rosenthal says investors with Financial Planning Services are watching their portfolios appreciate.

"We really take a look at a number of indices to measure ourselves against, including the S&P 500," Rosenthal says. "We're pleased with our performance and so are our clients. It's all because we tend to look at a risk-adjusted performance. That means how much downside capture and upside capture are we getting."

Rosenthal and Krafcik offer five stock picks for a diversified portfolio based on the investing theme of looking for companies in slow-growth industries, companies with yields outpacing Treasuries, and companies that act as a good hedge against inflation. These stocks are owned by some clients of Financial Planning Services and Rosenthal himself.

Duke Energy

(DUK) - Get Report

Company Profile

: Duke Energy is an energy company focused on electric power and gas distribution.

Role in Portfolio

: Dividend yield and slow-growth play

Closing Price

: $17.74 (Oct. 5)

Rosenthal's and Krafcik's Take

: "Right now we have the 10-year Treasury hovering around 2.5%. When you look at Duke Energy, we have the opportunity to buy a well-run utility company that is yielding significantly more. There's not a lot of risk, the company has strong margins, and it has a responsible capital structure. We like what we see. Over the last four years, they haven't had any blips over this entire economic cycle. They're poised to continue delivering that strong yield and outpace the market if we have a slow-growth environment."

Analyst Consensus

: Nineteen analysts covering Duke Energy rate the stock a "hold." Two other analysts say investors should buy shares, while three research firms have a "sell" rating on shares.


(V) - Get Report

Company Profile

: Visa is a global payment company.

Role in Portfolio

: Earnings growth and cash flow

Closing Price

: $74.99 (Oct. 5)

Rosenthal's and Krafcik's Take

: "This is a company that is gaining more market share around the world every day. They have been making a major push, particularly as we've gotten into tough times, to get more revenue from non-discretionary spending. Rather than luxury purchases, consumers are making everyday purchases like gas and groceries on their cards. That has helped to stabilize a lot of revenue, and we've seen Visa outperform analyst expectations for consecutive quarters. We're in Visa for the earnings growth and the strong cash flow."

Rosenthal and Krafcik also note that Visa has a five-year forward PEG ratio of 0.92, which allows investors to take a price-to-earnings ratio and factor in growth prospects for a company. A PEG below 1 raises interest in the stock as a buying opportunity. In addition, Visa is testing a "pay with smartphone" option and is trying to break into Asian markets, Rosenthal and Krafcik point out.

Analyst Consensus

: A whopping 28 analysts covering the stock have a "buy" rating on the shares. Another two analysts have a "hold" rating on the stock, while one analyst says Visa shares should be sold.


(CTL) - Get Report

Company Profile

: CenturyLink provides communications services, including local and long distance voice, Internet access and broadband services. The company was created by the 2009 merger between




. In April, CenturyLink said it will acquire



in a stock-for-stock transaction worth $22 billion, including debt.

Role in Portfolio

: Dividend yield and slow-growth industry company

Closing Price

: $40.09 (Oct. 5)

Rosenthal's and Krafcik's Take

: "At a time when yields are low, CenturyLink offers solid cash flow from a slow-growth industry. The company is using its strong earnings to acquire companies, and they are now the third-largest provider of Internet and cable. They're in the process of merging in Qwest and nine states have already approved the acquisition. Only 12 states are left to approve. The dividend yield of 7.4% is sustainable as long as revenue and profit margins stay constant. The good news is that CenturyLink operates in areas where major competitors have not entered the marketplace. That allows them to have these natural monopolies in less-densely populated areas where


(T) - Get Report



(VZ) - Get Report

are hesitant to enter."

Rosenthal and Krafcik also note that CenturyLink has a gross margin of 66% and operating margins of 32%, well above the industry average.

Analyst Consensus

: Nine out of the 16 analysts following CenturyLink have a "buy" rating on the stock. Another five analysts suggest investors hold on to shares, while two researchers have a "sell" rating on the stock.

Kinder Morgan Energy Partners


Company Profile

: Kinder Morgan is a pipeline-transportation and energy-storage company in North America. The company owns and manages a portfolio of energy transportation and storage assets.

Role in Portfolio

: Dividend yield and inflation hedge

Closing Price

: $69 (Oct. 5)

Rosenthal's and Krafcik's Take

: "Kinder Morgan plays into our investing theme on two different levels. It has a nice dividend yield of 6.3%. In addition, we have a little built-in inflation protection. Part of their revenue is tied to the price of the oil/gas flowing through their pipes, while another piece of their pricing scheme charges based on volume. The volume component helps to reduce earnings volatility. This one may see short-term price volatility. However, it pays a sustainable yield above most bond yields and the long-term prospects remain bright."

Analyst Consensus

: Fifteen analysts cover Kinder Morgan and not one has a "sell" rating on the stock. Six analysts rate Kinder Morgan a "buy" while nine say investors should hold on to the shares.

Quaterra Resources


Company Profile

: Quaterra explores for copper, uranium, molybdenum and precious metals in the U.S. and Mexico.

Role in Portfolio

: Inflation hedge

Closing Price

: $1.52 (Oct. 5)

Rosenthal's and Krafcik's Take

: "Quaterra is a junior mining company that looks and acts like a major. This is a strong inflation hedge, especially lately with all the coverage gold and silver is getting. The team is led by Tom Patton, the same team that found the Penasquito gold/silver mine, which is now owned through acquisition by



. Quaterra has a portfolio of about 20 properties right now, with exposure to gold, silver, copper, molybdenum and uranium. They're also under-covered considering it has joint ventures in place with Goldcorp,


(FCX) - Get Report

, and a few junior exploration companies."

Analyst Consensus

: There is no analyst coverage of Quaterra.

-- Written by Robert Holmes in Boston


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