Asset-heavy companies can serve as effective inflation hedges, but they also entail a downside. They must pursue substantial reinvestment to maintain their productive capacity. As such, they can actually fall victim to inflation. That’s because the added cost of reinvestment during a period of rising prices offsets the advantage of being able to pass along higher sales prices.

But there are important exceptions. Below, we examine two asset-heavy companies that avoid this dilemma.

The first exception applies to companies that own scarce or in-demand assets that don’t require substantial reinvestment. The second are companies that own assets that are virtually impossible to replicate.

PICO Holdings (NSDQ: PICO) is a prime example of the first exception.

Structured as a holding company, PICO operates in four primary divisions: water resource and storage (WRS), real estate, agribusiness and corporate.

The company’s WRS operations consist primarily of Vidler Water Company, a water resource development and storage business with operations in Nevada, Arizona, Colorado and New Mexico. The company owns land and associated water rights in those arid regions, which it then either leases or sells to other users. It also builds distribution or storage infrastructure which it can use to hold water to be sold later or to sell directly to end users.

In the first nine months of its current fiscal year, the company sold 1,021 acres of land and 3,063 acre-feet of groundwater rights in Arizona for $10 million, with a gross margin of $6.3 million. Two farms in Idaho were also sold for a gross margin of $763,000, as well as 98 acre-feet of water rights in Nevada which grossed $388,000. An additional $1.7 million was generated through lease revenue, or farms that operate on land which the company owns due to their water resources.

PICO’s real estate operations consist of its 57.7 percent ownership stake in UCP (NYSE: UCP), a real estate development company that recently went public. UCP owns or controls more than 6,600 development lots in high-demand areas of California and Washington state.

In the third quarter, the segment’s net income fell from a gain of $2.2 million last year to a small net loss of $231,000, largely due to higher operating costs. As a result of the IPO, legal and audit costs were substantially higher than in prior periods and salary and benefit costs rose as a result of new hirers.

The company’s agribusiness consists of a canola processing and refining facility in Minnesota capable of producing food-grade oil suitable for either cooking or industrial use as well as meal for animal feed.

The corporate umbrella is comprised mainly of venture capital investments in a handful of software and technology companies.

With the corporate operations accounting for just 17 percent of shareholders’ equity, more than 80 percent of equity is tied to real assets such as real estate (more than 40 percent to water), the canola processing facility or water rights.

While inflation tends to erode the value of pure financial assets, PICO Holdings should fare well during any inflationary bubbles since demand for water is a constant. Real estate also tends to perform well in inflation, particularly if it isn’t highly leveraged. That’s the case here, in light of the company’s debt-to-equity ratio of just 0.3.

That said, the disparate nature of the company’s businesses could result in volatile earnings performance. PICO Holdings is a buy for aggressive investors up to 30.

Enterprise Products Partners LP (NYSE: EPD) is another interesting asset-heavy company and an example of the second exception.

A master limited partnership (MLP), Enterprise operates in what is normally the extremely volatile natural gas business. But rather than producing or even selling the gas, it simply transports it from the well head to the hub via more than 50,000 miles of pipeline, barges and terminals. Instead of being paid based on the final value of the product, the MLP gets paid based on the volume of product it moves.

Enterprise’s assets are particularly valuable for several reasons.

First, regulatory hurdles make it difficult for competitors to move in and duplicate Enterprise’s network. That gives the company a degree of price control in its market.

Natural gas is also becoming an increasingly attractive asset in and of itself, thanks to rising prices. After years of doldrums following the recession, cheap gas and increasingly stringent emissions regulations have prompted many electricity generating utilities to transition from coal to cleaner burning gas. That’s helped push natural gas prices up in recent months.

At the same time, natural gas production in the US has been ticking up, thanks to the “fracking” revolution in the energy patch. So while US gas prices have been on the rise because of the relative glut of gas on the market, the prices Americans pay are nowhere near those paid in the rest of the world. Even with gas fetching between $4 and $5 per million British thermal units in the US, it goes for more than $10 in Europe and $15 in Japan. That’s pushing many producers to look at exporting their gas.

Enterprise already has substantial import and export capacity in Houston (about 14 million barrels per hour) and it has entered into a deal to significantly expand that capacity.

Energy commodities are often the first to move in any inflationary burst and those higher prices can often dent demand. But Enterprise’s growing exposure to the export market will provide a significant degree of insulation for its gas flow volumes.

Enterprise Products Partners LP is a terrific inflation hedge up to 70.