Who's afraid of inflation? Most investors are, and Federal Reserve Chairman Alan Greenspan is spooked by its mere shadow. But investment adviser Stephen Leeb argues that a touch of inflation wouldn't be so bad for the stock market--so he remains bullish even if inflation does creep up a bit.

Leeb says that the market's current high valuations need strong economic growth. The alternative, he warns, is a vicious cycle of slowing growth that will spark a big drop in stocks as earnings start to dive--and trigger an economic deterioration. So he believes the Fed will back off and allow the economy to grow at a fast pace, even if that means tolerating inflation.

Leeb, editor of the market newsletters Personal Finance and The Big Picture, has a crafted portfolio that is leveraged to rising growth and inflation. Two of his favorites: Fluor (FLO), a global engineering and construction outfit whose stock plummeted from 75 a share in mid-February to 52, and auction house Sotheby's Holdings (BID), which slid from 19 to 15 in less than three months.

Fluor took a beating after it reported earnings below analysts' estimate for the first quarter that ended Jan. 31. The shortfall stemmed from cost overruns on two projects, explains Leeb. In fact, he says, Fluor reported an increase in new orders by a better-than-expected $3.6 billion--evidence of real strength.

The surge in orders, he says, is due to big demand from developing countries as their economies heat up. Such nations make up more than 60% of Fluor's backlog.

Fluor's price-earning ratio is at a 10-year low, which "doesn't make sense because its long-term prospects are better than ever," says Leeb. It is trading at 13 times Leeb's estimated 1997 earnings of $4 a share. In two years, he expects the stock to hit 100.

Shares of Sotheby's, Christie's larger rival at the high end of the art market, "are among the surest bets on rising worldwide disposable income," says Leeb, and one of the "safest and surest long-term inflation hedges." Expected to earn 97 cents a share in 1998 and 83 cents in 1997, Sotheby's is worth 25, he says.

Also bullish on Sotheby's: Henry Kravis and the Bass brothers, who both own more than 5% of the stock.

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