The Return of Buy and Hold?

by: Michael Shulman

Something odd is occurring among retail and individual traders. Buy and hold is coming back – in small doses. When I first began writing about investments and speaking at Money Shows, even active investors were mostly buy and hold types. Fast-forward to 2010 and most active investors set targets and get out. They have five to ten percent of their portfolios in very active trading, a bunch in cash and bonds, and some in stocks and ETFS they move in and out of depending on how that stock performs.

And now, some are putting away a bit of their funds for classic, long term Buy and Hold stocks, ranging from dividend payers with a great names such as GE (NYSE:GE) to smallish, speculative biotech’s with the potential of ten to one or one hundred to one returns.

So, yes, Buy and Hold is back, but in a very different way than we saw it in the 1990s and the earlier part of this decade.

If you too are thinking about a Buy and Hold component of your portfolio, where should you look? Three places:

Deep value stocks – Companies that are, simply put, safe and cheap.

Speculative stocks – Companies that could go bust or could produce spectacular returns, such as biotech and clean energy.

Dividend stocks – Companies that produce monthly or quarterly income and are based on long-term demographic trends such as gas pipeline companies and trusts.

How do you pick among the many choices?

• Demographics are destiny – More people means more consumption of some basics, such as energy, and an aging population means more consumption of health care products.

• Uncle Sam is always here and there – Get over the noise, Uncle Sam has been involved, directly or indirectly, for a long time and will continue to be so. Use government policies; as they stand, and as they will probably evolve. For example, clean energy is in over time, and so is cost control in health care.

• Cash and debt – Look for companies with lots of cash and/or low or no debt; at worst, easy to manage debt. Five seconds on Yahoo will give you this data.

Put these two sets of criteria together and you will get a much smaller universe of names. Take a look at the following stocks, some of them I have recommended in my service ChangeWave Shorts, which actually has many long positions, shorting being a state of mind in addition to a type of trading.

Questcor (QCOR) – Very cheap, incredible margins and cashflow, brought back two million shares or roughly 3% of the float last quarter. They make a gel that treats radical infantile spasms (and multiple sclerosis spasms). The stock has been on a tear, no obstacles or competition in their way. And even Uncle Sam and the insurers are glad to pay what they ask for their treatment, Acthar, since no one wants to let a baby die. Five year target -- $17-$22.

Impax Labs (NASDAQ:IPXL) – A small, specialized generic drug maker with world-class technology to manufacture hard to make time-release drugs. With near $200 billion in branded drugs coming off patent in the coming years, well, it's a simple story. And Uncle Sam wants everyone to use generics. Five year target - $32-$40.

Apple (NASDAQ:AAPL) – Yes, a two hundred and thirty dollar stock can be cheap – Berkshire Hathaway was cheap at $30,000 a share. The company has more cash than Greece and most of eastern Europe combined, is selling at the same multiple as the market and half it’s historic multiple. The iPad, according to ChangeWave surveys is going to be a runaway hit. Need I say more? One more thing, their business is about 100% independent of anything related to Uncle Sam. One more thing again, with all that cash, they may, someday, pay some of it out in dividends. Five year target - $550-$750.

• Natural gas pipeline companies – Uncle Sam, population growth and shrinking icebergs all favor these stocks. Take your pick – how much stock price appreciation versus current dividends is the question to ask. The summary page at Yahoo is here.

Cerus (NASDAQ:CERS) – A mix of healthcare and technology, this company makes a blood pathogen inactivation system – kills bugs in the blood – to produce blood platelets and perhaps, someday, red blood cells. They are years ahead of any potential competition, approved in the major European countries, waiting for approval for their final trial design in the US. For purposes of disclosure, I own lots of it. Five year target - $14-$22.