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).

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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.

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Kathy Kristof
Contributing Editor, Kiplinger's Personal Finance
Kristof, editor of SideHusl.com, is an award-winning financial journalist, who writes regularly for Kiplinger's Personal Finance and CBS MoneyWatch. She's the author of Investing 101, Taming the Tuition Tiger and Kathy Kristof's Complete Book of Dollars and Sense. But perhaps her biggest claim to fame is that she was once a Jeopardy question: Kathy Kristof replaced what famous personal finance columnist, who died in 1991? Answer: Sylvia Porter.