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NEW YORK (CNN/Money) -
Consumer prices may be up only 2.8 percent over the past 12 months, but investors are still worried that inflation will pick up within the next couple of years.
One of the key reasons for these inflation fears is the high price of oil, which has remained above $50 a barrel for most of the past four months.
Given those concerns, it certainly makes sense to include inflation hedges in a stock portfolio. But with most energy stocks and most real estate investment trusts at relatively high valuations, it's hard to know what to buy.
One choice that's increasingly popular among value-oriented investors is the raw materials sector. Shares of companies that produce copper, nickel, aluminum and the like ought to profit from any upward trends in commodity prices. Equally important, these stocks should be prime beneficiaries of rising demand from countries such as China and India.
Not all raw materials producers are financially strong, and some have highly cyclical earnings. Among the group, Alcoa stands out as a high-quality choice. Consensus projections for annual earnings growth over the next five years are as high as 14 percent.
That figure is higher than the average for the industry and for the S&P 500. In fact, it compares favorably with earnings projections for blue-chip growth stocks.
Despite these long-term expectations, investors have taken a skeptical view of the stock over the past year. As a result, Alcoa's share price is down 20 percent since November.
Analysts have been concerned that Alcoa's cost-cutting plans may be running behind schedule. In addition, prices for aluminum have also been a bit soft, perhaps because of fears of an economic slowdown. At the same time, profit margins have been squeezed by high prices for energy.
The numbers say otherwise
So investors were pleasantly surprised last week when Alcoa reported earnings that beat expectations by a penny a share. For the second quarter, earnings rose by nearly 14 percent on a 13 percent increase in sales.
Those strong results have led to some bullish projections for the stock. But most analysts remain cautious -- and a few have trimmed earnings estimates for this year to only a 9 percent gain.
Target prices for the stock now vary enormously. Some see a gain over the coming year of less than 10 percent from current levels, while bullish analysts see the possibility of as much as 35 percent.
I see no way to predict the short-term behavior of this stock, which depends on so many factors, including oil price shocks. But I do see a convincing long-term case for including the stock in a portfolio.
Alcoa (Research) dominates the production of a key industrial metal. Fundamentals are discouraging at the moment, but the company has been able to remain on track. Any improvement in economic trends would swiftly boost the bottom line.
Moreover, valuation is conservative. The share price is less than 10 percent above its 52-week lows. And at $27.80 a share, Alcoa trades at less than 13 times next year's projected earnings.
There's no way of knowing whether the second half will include a subpar quarter or how long it will be before Alcoa can steadily turn out numbers as good as those for the quarter just ended. But for patient investors looking to add an inflation hedge, this looks like a top choice.
Sivy on Stocks resources:
Sivy 70: America's best stocks
Guide to Growth
Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Tuesday.