Inflation is threat to stocks

Inflation is the real threat to the stock market, says Dow Theory Forecasts (7412 Calumet Ave., Hammond, IN 46324).

"There's more to the inflation story than just expensive oil. We're starting to see for the first time some pricing power in corporate America. The big problem is the adverse impact inflation has on the price-earnings ratios of stocks. Inflation is especially brutal on the types of growth or speculative stocks trading at exorbitant price-earnings ratios."

Enterprise Growth Fund has mixed macroeconomic analysis with fundamental analysis to produce 11.34 percent average annual gains over the past 15 years. It sticks with large-cap stocks, favoring those with earnings-growth rates of 10 percent or more. It's also quick to pull the trigger. It will consider selling a stock when it rises to a premium of 20 percent of the fund's estimate of its intrinsic worth. Recent favorites: Procter & Gamble, Gillette, Coca- Cola, Medtronic, United Parcel, Pfizer, Citigroup.

According to the U.S. government, more than 90 percent of corporate and governmental organizations spend money to guard against computer viruses. This will only become a bigger and more expensive fight as hackers and virus writers get smarter, predicts Personal Finance newsletter (1750 Old Meadow Road, McLean, VA 22102). "Costs for PC defense are climbing at a rate nearing 25 percent annually. That's great news for the stocks of anti-virus manufacturers like Central Point Software and Symantec."

An undiscovered stock is, by definition, cheap. And what makes a stock undiscovered is that it's not followed by any Wall Street analysts. With that in mind, Smart Money magazine (1755 Broadway, New York, NY 10019) recently went looking for promising wallflowers. It found eight that are in the top half of their industries based on five-year earnings and revenue growth, and in the bottom half based on price-book and price-earnings ratios. Yet all remain completely uncovered on Wall Street. The eight: Autoliv, Curtiss-Wright, Downey Financial, Interactive Data, PolyMedica, School Specialty, Stewart Information Services, Thomas Industries.

If you're in the market for savings bonds, Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything in Between," recommends buying series EE bonds next month. Pederson expects their rate to jump to between 3 percent to 4 percent on Nov. 1. Because EE bonds have historically yielded 2 percentage points over inflation, they're a better deal than inflation-indexed series I bonds, which are paying a fixed rate of 1 percentage point over inflation.

When choosing a mutual fund, you should avoid funds with back-end loads (sales commissions that go to the broker), advises Forbes. "But you should favor those with redemption fees (an assessment on short- swing trades that reverts to other fund shareholders). Among the major fund families with redemption fees on at least some of their funds: Fidelity, Oakmark and Vanguard."

Site of the Week: Check www.wilshire.com for information on both sectors and broad market indexes. Its index-return calculator lets you pick time periods and indexes to determine the resulting return. Descriptions and fundamental data are also provided.

Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.

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