May 28, 2010
Economics experts agree that one of two things is about to happen here in the United States: inflation or deflation. So there you go. Could the outlook be any clearer? Seriously, trying to predict which way we're going to go is like trying to predict heads or tails in a coin toss. But if you're an investor, it's an important issue to get a bead on.
As Motley Fool Income Investor's James Early explains, some companies are geared to grow when the economy is pumped up on low-cost money, while others tend to thrive when banks are stingy and stagnation is the order of the day. Typically, during inflation, investors want to look for companies carrying a lot of debt, because those companies are able to pay that debt back with money that's worth less as time goes by. DuPont (NYSE: DD ) is a great example of a company that could be in a position to unload its debt at a discount during an inflationary period --and thus strengthen its bottom line.
But if things go the other way and we encounter deflation, investors should be looking for companies with little debt and strong pricing power to attract capital despite the tight lending environment. Companies such as Apple (NYSE: AAPL ) and Google (NYSE: GOOG ) fit this description beautifully.
James Early says that while investors can hedge the currency question by keeping a balance of debt-laden and debt-free companies in their portfolios, there might be a better answer: Canada. Our northern neighbor's more conservatively managed economy is significantly less leveraged than our own, and that may translate to less volatility and risk for investors in companies such as oil and gas distributor Enbridge (NYSE: ENB ) or full-service financial institution Bank of Nova Scotia (NYSE: BNS ) .
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