Today's article begins to assemble specifics towards creating The Perfect Portfolio, as outlined in an earlier article. I focused on the first asset class of large-cap growth stocks already. Today I'll stuff the portfolio with large-cap value stocks.
With large-cap value stocks, I want to anchor the asset class with at least one ETF or mutual fund and turbocharge the rest of the class with stocks I want to own at least until they reach what I think their intrinsic value may be. On a very, very broad basis, that means a PEG ratio somewhere around 1. At that point, it's possible that they may not have reached my intrinsic value calculation, so they may get removed from the portfolio or get switched over the growth class. My goal is diversification, but more in asset class than sector or industry. I don't like purely mechanical models. I trust my gut as it has served me well over my investing years.
I'm grounding this asset class with a core position in the Yachtman Focused Fund. The fund itself contains world-class names like News Corporation (NWS), PepsiCo (PEP), Proctor & Gamble (PG), Pfizer (PFE), Clorox (CLX), Sysco (SYY) and Microsoft (MSFT). These are arguably more blend stocks than value, but it's tough to find true large-cap value stocks these days and I deliberately left out the blend category because I've always found it kind of fuzzy. We'll see more true value picks in the mid- and small-cap arena. I also am adding an ETF that gives me some financial exposure since I think financials as a whole are being avoided unnecessarily. Wisdom Tree Dividend Financials (DTN) has a 3.22% yield, is up 10% YTD and offers some strong names in the financials group that I don't have exposure to yet.
To add to this, I'm adding the controversial Citigroup (C). I trust in the assessment of Bill Ackman, the manager of Pershing Square Capital, regarding Citi's future. It's separating out all the toxic assets. If he's in for $600 million, I think it's a wise move to go in alongside.
I have always been intrigued by the holdings of John Malone's Liberty Media, and its Liberty Media Interactive (LINTA) tracking stock has all the hallmarks of a value play. Wall Street has never understood how Liberty's tracking stocks should be valued. But Liberty Interactive has assets such as QVC that toss off tons of free cash flow, and owns premier internet retail stocks that have tremendous growth and strong cash flow. I don't think analysts are correct in the stock's growth assessment.
I'm adding Teva Pharmaceutical (TEVA). The company is a leading generic provider and also has its own proprietary drugs. The company pays a 1.6% dividend and is on the cheap side going back several years. I'm also a big fan of DirecTV (DTV), as the company continues to expand its domestic market share, is growing like gangbusters in Latin America, and has billions of dollars on its balance sheet and cash flow statement. Its PEG ratio is 0.5 on next year's earnings. Finally, I'm adding Discovery Communications (DISCA) for its extraordinary television brand name and strong profit margins.
That's the second 16% of The Perfect Portfolio. Next time I'll add in mid-cap growth names.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.