As we enter the era of world inflation courtesy of major central banks de-basing their currencies like no tomorrow (the FED and ECB being the worst of the two, though the latter stands on much stronger economic footing), it is imperative one's portfolio be comprised of those equities which will outpace or at least keep up with inflation. This is most efficiently done in my opinion by being overweight commodity equities as well as international consumer durables, some technology and infrastructure. I am particularly fond of those commodities that serve as inflationary hedges and those with supply-demand disconnects.
1) Silver Wheaton (SLW) - I have talked multiple times about this extremely dynamic business model and the transformational year 2009 has been for the future of this company. Management continues to execute deals and acquire a diversified group of royalty streams at bargain basement prices. Not only will they be the lowest cost producer (under $4.00/oz) but they will also become one of the world's largest producers (peak production of 50m oz per annum assuming 2 development projects come online within the next 5 years or another acquisition which they have made crystal clear in the most recent conference call). This is the best inflationary hedge in my opinion as they pay no income tax (has made arrangements with the Canadian government to either reinvest all excess profits or pay them out as dividends). That being said in one or two more years, these royalty streams will sell for a much bigger premium relative to today. This means a payout ratio of 75-85% will likely be in place by 2015 or so.
2) Suncor (NYSE:SU) - I think Suncor's brilliant acquisition of Petro-Canada (PCZ) will eventually make it one of the largest oil companies in the world. This has to do with the misunderstood future implications of the oil sands. Suncor will become one of the largest oil sands producers in addition to having both up-stream and down-stream business segments.
3) Philip Morris Int'l (NYSE:PM) - Far and away an ideal core holding in any portfolio in any economic environment. It has a rare combination of high-single digit/low double digit long term growth, high payout ratio and yield, best of breed management, diversified revenue stream (in terms of currencies around the world) and whose product has addictive properties. They will be able to pay down long term debt in depreciated dollars as their income stream will soon be comprised of much stronger currencies.
4) Potash (POT) - Though most market players are bearish on this very important fertilizer, Potash has a Price vs. Value disconnect and will continue to play an important role as provider of the ideal fertilizer (with several caveats depending on the crop) as well as the many byproducts extracted. No substantial potash mine has been discovered in quite some time (barring Potash one's potential gem) as it mainly grows in Canada and Russia.
5) Coeur d'Alene Mines (NYSE:CDE) - This turnaround story has impressed me, which transformed them from a financially questionable entity to a free cash flow machine, starting in Q4 (drastically declining cash coast and little capital requirements). They are a diversified silver miner (geographically speaking), have a nice mixture of gold and silver - 200-220k oz of gold in 2011 and 30m oz of silver. They have 3 flagship mines coming online (though one is in Bolivia), which should make this overlooked miner a good investment.
6) Jaguar Mining (NYSE:JAG) or Yamana (NYSE:AUY) for the more conservative investor - These are the two best ways to play South America (Brazil, Argentina, Chile) in my opinion. Yamana has put together a very nice group of producing assets, advanced stage and development stage pipeline projects. They were built via a massive wave of acquisitions a few years back and management has shown their understanding of the macro-economic environment as Yamana is at the beginning of their growth spurt from 1m oz to 2m oz per year by 2013-2014. But I tend to favor Jaguar Mining as they boast a much more lucrative valuation, growth profile and have showed their ability to execute their objectives. They have a good track record of steady sequential production growth which will soon be kicked in to high gear as they bring on a new mine online, ramp up existing producing assets and finish their expansion projects. Growth will jump from 165k oz in 2009E to 700k+ by 2014.
7) Pengrowth (PGH) - A great Canadian oil trust play with an undervalued valuation, high long term growth and well as a lucrative dividend. Though they will also lose their tax status in 2011, the long term fundamentals of oil combined with inflation should move black gold near or past its record highs over the next 2-5 years. These trusts (Enerplus (ERP), Baytex, Pennwest (PWE)) aren't going unnoticed by the rest of the world as China has made a bid for harvest energy trust. So along with high leverage to oil, high long term growth, high dividend yield and a potential buyout target, Pengrowth is worth taking a look at.
8) BHP Billiton (NYSE:BHP) - Though already a mega-cap, BHP has many catalysts in the near and distant future. Near term catalysts include large gold, silver, copper and a vast array of other base metals. They also have a large contract to begin exporting uranium to China, starting in 2010 and likely to extend for many years to come. They have also, like many other (including myself) realized the potential potash holds for the future and have acquired a potash mine in Canada. Being the worldwide supplier of so many commodities entering the next leg of the commodity bull market while the inflation tsunami slowly takes hold makes BHP a great candidate for anyone's portfolio - most notably those who are more risk averse but want some exposure to those commodities mentioned above.
9) The ETN RJA (NYSEARCA:RJA) (Replication Of Jim Rogers Agriculture Index) is one, if not the best, way to play agriculture in general, excluding futures. The top holdings happen to be my favorite (perhaps I'm a bit biased because of this), which include Wheat, Corn, Soybeans, Cotton and several other. Wheat has a production-consumption gap that has been narrowing for over a decade and will likely be demanded in higher quantities as the standard of living continues to increase in the emerging countries (BRIC) and the ones that will come after that.
10) The tenth should be comprised of a combination of cash (for opportunities that may come along) and hedges (such as put options on an oil index, mining index or call options on the double inverse of the Dow or S&P).
Disclosure: Long SLW, CDE, AUY, JAG, PGH, PWE, RJA, GDX PUTS, DXD CALLS, SDS CALLS.