Stock Quotes in this Article: DUK, UNH, VZ

MINNEAPOLIS (Stockpickr) -- Prevailing wisdom in the market suggests that investors should be more worried about inflation than deflation. Certainly the commodity markets are priced accordingly. And with the Federal Reserve printing money with its low-interest-rate policy, it is easy to see why such a view has taken hold.

But I’m not buying it. I can appreciate the concerns, but inflation requires a plethora of currency in the hands of those doing the spending, and that's not the current situation. While the rich have gotten richer, the working class has struggled. Jobs are scarce, and income gains are minimal at best. These are the folks that do most of the spending, and they are feeling pinched.

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    How else do you explain the continued moribund status of the real estate market?

    The hope of the central bank is that low interest rates will allow corporations to invest in business, resulting in job creation. That may be happening to a certain degree, but is the current economic recovery sustainable?

    I don’t think it is from a long-term standpoint. Our fiscal debt will be a drag on the economy for many years to come. The only thing that has prevented a Japanese-style deflationary spiral is the Federal Reserve's keeping interest rates low.

    Skeptics of Fed policy will say that printing money will only create inflation, but I think those skeptics fail to appreciate the downward spiral that is being held at bay due to such policy.

    It is a delicate balance, for sure. At the moment, central bankers are winning the battle, as evidenced by several quarters of positive economic growth. Tinker with that balance and that sucking sound you hear will be more than just jobs heading south -- it will be asset depreciation of epic proportion.

    So where should investors invest? Here are three stocks that should do well in a deflationary period.

    Verizon

    Telecommunication stocks are said to do well during periods of deflation. As a utility, these companies do business irrespective of the overall price environment. The ability to communicate with each other is a need that trumps most other things.

    That makes for a very dependable cash flow business that investors can count on. One of my favorite telecommunication names is Verizon (VZ). In addition to having the above-mentioned utility characteristics, Verizon has some pretty solid growth prospects thanks to its relationship with Apple (AAPL).

    With the iPhone now available on Verizon’s network, the company has a tremendous opportunity to withstand any sort of price deflation environment. In order to protect your portfolio when prices are dropping, you need to have as many things going in your favor. For Verizon, the Apple relationship is one of those things.

    Helping matters is the fact that Verizon pays a dividend of more than 5%. It will take a major disaster in the economy to put that payment at risk. Verizon is a great stock to own during deflation.

    Verizon shows up in a couple of Stockpickr's most-popular professional portfolios. As of the most-recent reporting period, it comprised 0.5% of George Soros' Soros Fund Management portfolio and 1.7% of Bruce Berkowitz's Fairholme Capital Management portfolio. Verizon is one of TheStreet Ratings' top-rated telecommunications stocks.

    Duke Energy

    A purer utility play is Duke Energy (DUK). The North Carolina-based company has its tentacles in many things that consumers depend on in their daily lives. Duke owns and operates power-generating facilities, transports and sells natural gas, and is involved in the telecommunications business with a fiber optic network primarily in the Southeast.

    Prior to the earthquake in Japan, Duke was uniquely positioned to withstand a deflationary period. Unfortunately, Duke’s exposure to the nuclear industry has resulted in investors selling shares. I think the reaction is overdone.

    Although the headline may be extraordinary, and I understand the concern, the nuclear plant in Japan has held up well, all things considered. I don't think the damage from the earthquake will impact the future of nuclear.

     

    But even if it does, Duke’s cash flow is strong enough to withstand deflation in the economy. Selling that comes due to the situation in Japan is an opportunity to buy shares on the cheap. The company pays a dividend of more than 5%, providing a nice cushion to wait out any storm in the stock market.

     

    From a valuation perspective, Duke trades for 13 times forward earnings. The company made a profit of $1.42 per share last year. Analysts expect the company to make $1.36 per share this year and $1.38 per share in 2012. That stability of earnings is exactly what investors should look for in a deflationary environment.

    Duke is a great stock to own as prices decline.

    Duke showed up on a recent list of the 20 highest-yielding utility stocks.

    UnitedHealth Group

    Deflationary investors should focus on companies providing goods or services that are needed. They say only two things are certain in life: death and taxes. I would add health care needs as a third. The recent debate on the subject in the U.S. shows just how important the industry is to consumers.

    That is music to the ears of anyone looking to invest during deflationary conditions. One of my favorite names in the health care space is UnitedHealth (UNH). The company is a proven winner and has grown to be one of the important names in the industry.

    Its shares are cheap and likely to withstand any sort of correction in the market. Over the last two years shares of UnitedHealth have moved steadily higher thanks to the certainly of healthcare legislation. With little headwinds going forward and an incredibly favorable demographic trend, UnitedHealth offers investor growth prospects in addition to capital preservation.

    Analysts expect UnitedHealth to make $3.79 per share in 2011 and $4.21 per share in 2012. At current prices shares trade for just over 10 times forward earnings. Add in a 1% dividend, and UnitedHealth is a good stock to own for those looking to invest in a deflationary environment.

    David Tepper's Appaloosa Management increased its position in UnitedHealth by 54.1% in the most-recent reporting period. The stock is one of TheStreet Ratings' top-rated health care provider stocks.

    RELATED LINKS:

    >>3 Inflation-Beating Stocks to Watch
    >>5 Restaurant Stocks: Buy, Sell or Hold?

    >>3 Stocks With Rising Analyst Expectations

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    To see these stocks in action, check out the 3 Stocks to Fight Deflation portfolio.

    At the time of publication, author had no positions in stocks mentioned.

    Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.