investing

Our Practical Investor Fights Inflation with These 6 Investments

Kathy Kristof invests her real money to help you be a better investor. Her latest buys protect her portfolio from rising prices.

Misery is watching the stock market soar while sitting on $70,000 that you haven’t yet put to work. Thank heavens that growing concerns about the health of China’s economy temporarily knocked down share prices. That gave me a chance to buy at better prices six stocks that I thought were already cheap.

My newest purchases are aimed at protecting my portfolio from the long-term threat of rising prices, which I think is inevitable with a steadily improving economy and continuation of the Fed’s loose-money policy. My inflation-fighting strategy is to buy shares of companies that have pricing power -- such as Apple (symbol AAPL), Intel (INTC) and Target (TGT) -- and to invest in real estate, commodity and finance companies. Here’s what I bought over the past month, all in roughly $10,000 batches:

A real estate investment trust based in Greenwich, Conn., Starwood Property Trust (STWD) invests in commercial mortgages. The company earned $119 million in 2011, up from $57 million in 2010. I bought at $21.51, or 16 times last year’s earnings. As a REIT, Starwood must pay out most of its earnings each year. At a recent price of $21, the stock yields a juicy 8.4% (recent prices are as of April 5).

Another REIT with a similar story and an outsize yield (10.2%) is Apollo Commercial Real Estate Finance (ARI). Also a commercial mortgage lender, New York City–based Apollo last year posted a double-digit hike in profits while reducing its future borrowing costs. I bought at $16.03. At $16 recently, the stock trades at 12 times the past year’s profits.

Known as a business development company, American Capital (ACAS) invests in midsize firms, usually by lending them money with the proviso that the debt could be converted into stock at a later date. It’s a risky business, but one for which American Capital can be well compensated. The Bethesda, Md., firm had a near-death experience during the financial crisis, suffering enormous losses in 2008 and 2009. But it earned $974 million, or $2.74 per share, last year. As of December 31, American Capital’s net assets were valued at $13.87 per share. At my purchase price of $8.95, I bought those assets at a 35% discount.

Stone Energy (SGY) is a Lafayette, La., oil-and-gas producer with reserves in Appalachia, the South and the Gulf Coast. Revenues jumped by roughly 30% in 2011, and the company’s profits doubled, to $194.3 million, or $3.97 per share. At my $30.10 purchase price, Stone was selling for about 7 times estimated 2012 earnings. Recently, the stock was at $28.

Dover Corp. (DOV) is a diversified industrial company. Among its products: the tiny microphones that go into cell phones and tablets, and refrigeration units used in grocery and convenience stores. I recommended the shares in January in 8 Stock Picks for 2012 at $55. When I bought at $61.74, the stock was still selling at 13 times estimated 2012 earnings (it fetched $61 recently). Analysts expect Dover’s earnings to grow about 12% annually over the next three to five years, and the stock yields 2.1%. Bottom line: Dover is still a good deal.

Finally, I bought a Chinese Internet company called Sohu.com (SOHU). Why? I follow a blog called Citron Research, which normally exposes fraudulent accounting, frequently at Chinese companies. Citron did a piece recently that said Sohu was both legitimate and a buy. It was such a departure for Citron that I bought the stock, at $54.89, without further research. It traded at $52 recently.

With my latest purchases, I now own 18 stocks and one exchange-traded fund, Vanguard Total Stock Market ETF (VTI), which serves as my market benchmark. That means I’ve invested $190,000 of my original $200,000 commitment. Assuming the market doesn’t go nuts, I’ll buy one more stock and finish the portfolio over the next month.

Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance and author of the book Investing 101. Follow her on Twitter. Or email her at practicalinvesting@kiplinger.com.

ORDER NOW: Buy Kiplinger’s Mutual Funds 2012 special issue for in-depth guidance on the only investments you need.

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