3 smart stocks to hedge against inflation

The dollar could slip lower or at least stay at relatively depressed levels. These picks will benefit in that scenario.

By InvestorPlace Oct 30, 2013 12:14PM

By Jeff Reeves


iplogoImage: Inflation (© Nick Koudis/Getty Images)The U.S. dollar has been persistently strong across the last several years through thick and thin, while inflation has remained quite modest. As measured by the Consumer Price Index or CPI, inflation hasn’t topped 3% since November 2011 and hasn’t been above a 4% annual rate since the first few weeks of 2008.


But with quantitative easing in force, persistently high unemployment and no sign of "tapering" to the central bank policy anytime soon, some are wondering if this long run of modest prices is about to end.


In this environment, there’s a chance that the dollar could slip lower or at least stay at relatively depressed levels -- sparking inflationary pressures that affect commodity prices in materials, energy and food.


Even without breakneck demand propping up prices thanks to economic growth, we could see modest inflation in 2014 and beyond in this environment. If that happens, consider investing in these stocks:


Senior Housing Properties Trust

As the name implies, Senior Housing Properties Trust (SNH) is a real estate investment trust that plays senior housing. SNH operates about 370 properties around the U.S., including senior living communities and related medical businesses.


Senior Housing Properties Trust pays a very nice 6.3% dividend, although right now the company is paying out more in dividends than it makes in profits, thanks to a spate of acquisitions in the last few years and a lot of debt taken on as part of these deals. But the flip side is that these ambitious acquisitions -- like a 2011 deal worth over $300 million to acquire 20 senior living facilities -- have allowed Senior Housing Properties Trust to become a dominant player in the space.


And recently, Senior Housing Properties Trust also entered a deal to sell off some rehab facilities to generate some cash and focus on its senior housing mission.


SNH is only up by about 5% so far in 2013, but in an inflationary environment the real estate holdings will allow this stock to move higher. After all, nothing holds its value amid high inflation better than hard assets like real estate -- and the sites Senior Housing Properties owns will be able to command higher rents and deliver even bigger dividends to shareholders.


ConocoPhillips

ConocoPhillips (COP) is smaller these days after spinning off its refining operations as Phillips 66 (PSX) in 2012. But that has allowed the core exploration and production business of COP to shine thanks to the shale boom -- free from volatility in the refining segment of the energy market.


After shedding billions of dollars in foreign and non-core assets, ConocoPhillips invested big on U.S. shale fields such as the Bakken formation in the Dakotas, and production has been soaring as a result. For instance, COP saw adjusted production of 1.51 million barrels of oil equivalent per day last quarter vs. 1.489 million a year ago. That’s only a modest uptick on paper, but for a company this scale it’s mighty impressive.


Energy prices always move higher when inflation takes hold, so it’s important to have some oil and gas exposure in your portfolio as a hedge. When you throw in the 3.8% dividend, too, it makes the case for Conoco even more compelling.


Gerdau

Gerdau (GGB) is a Brazilian steel company that has been hurt by the economic downturn and weak demand for base metals. Manufacturing and construction has been soft, particularly in Brazil’s key trade market of China, and this has weighed on GGB.


However, despite a 15% decline in 2013 and a flop of about 60% from its 2010 highs the company could be bargain buy.


Gerdau stock trades for a forward P/E of about 9 and a price/sales of a bit more than 0.7. That means that a lot of the negativity has been priced in. GGB is still nicely profitable after efficiencies made during the downturn, and pays a 2% dividend that is very sustainable at less than half of its total earnings.


Steel prices will soar in an inflationary environment, boosting the bottom line for GGB even if production doesn’t budge. Given this upside and the nice income potential, Gerdau may be a good place to hide if you’re afraid of inflation.


For two more stocks to hedge against inflation, click here.


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