Before I begin it is important to note the following companies do not make up my own personal portfolio. However, as you will see at the bottom, I do hold some of the companies mentioned. The main point is to give investors a glance at what would make a strong diversified portfolio.
There are an almost infinite number of ways to diversify a portfolio. The five companies I chose are long term growth companies with strong futures. Also, all five come from different sectors; which means investors will gain as sectors rotate strength and weakness.
The first company for a strong portfolio is Caterpillar. Caterpillar is an excellent choice because the company is one of the leading industrial and commercial machinery suppliers in the world. Whether a developing country needs a new street or mine, Caterpillar can supply durable and reliable machinery that will last. And, in my opinion, the world will continue to develop until the modern world collapses upon itself. Therefore Caterpillar's future is very bright.
A less opinionated reason Caterpillar is a strong portfolio company is the fact that the company boasts a small dividend of 46 cents per share. Also, the company continues to innovate to stay ahead of the little competition in this sector. Many machinery companies exist, but few can argue better performance than Caterpillar. The innovation I speak of includes acquiring other companies. Because of these aquisitions, Caterpillar's cash on hand is puny compared to other large cap growth companies. But the small amount of cash is nothing to worry about because Caterpillar buys other companies that fill in the holes and further strengthen the overall goals of the company.
Lululemon is a great retail stock for any portfolio. Some say that Lulu is like Nike (NKE) for women because the company sells athletic wear specifically for women. One reason Lulu has been able to succeed is the business model; which focuses on wealthy areas. This same model has helped Whole Foods succeed as well. Focusing on wealthier communities is smart because the wealthy tend to have more free time to exercise, therefore Lulu is in a prime position to take advantage of the healthier lifestyles Americans want. Also of note, the upper classes are not as affected by recessions, therefore Lulu will be less affected by future recessions.
Other reasons Lulu is a strong long term portfolio choice is the fact that Lulu is still in expansion mode. Therefore more stores will continue to reach out to more people as time goes on. And as the country continues to crawl out of this past recession, people will be more willing to spend more money in the upcoming years. Also, Lulu looks good after the recent 2 for 1 split. This makes the share price look much more "buyable" as 60 looks like less than 120. Granted investors will own less of a percent of the company, but the share price should be back to the 100 range in less than a year.
Exxon Mobil (XOM)
One company from the energy sector that will further diversify your portfolio is Exxon Mobil. Exxon is poised to reap the benefits of natural gas if American politicians realize natural gas can alleviate the pressure of foreign oil to the nth degree. Since the company is innovating to take advantage of all the different energy concerns the world has, Exxon will return top dollar to investors.
One negative is the increased chance of lawsuits as oil companies are prime targets anytime there is an oil spill, regardless of the size. Lawsuits are important for long term growth because lawsuits lower net income margins. However one important positive is Exxon's 47 cent per share dividend. The dividend may be small, but Exxon investors should care more about the benefits of continuous oil price increases as well as the future of natural gas. These two energy options will continue to move Exxon forward while the dividend increases in the process.
The fourth pick to make a strong portfolio is Apple. First off, Apple has a cash pile that will be nearly impossible to spend. Granted the recent lawsuits may be a sign for concern in the future, but Apple will most likely not be affected in the short term. Apple is a strong pick because the company has continuously innovated for decades. In fact Apple has become more profitable than many computer companies over the years, including Microsoft earlier this year. Most of this innovation stems from the blockbuster iPhone that single handedly revolutionized the cell phone industry.
While Apple is a strong portfolio choice, it will be difficult for the company to continually innovate over the next 10 or 20 years. However it must be noted Apple is usually at the forefront of innovation; therefore if Apple can't create any new products, the odds of another company doing so are very slim. This is important because if nothing changes from today, Apple will stay on top.
Natural Resource Partners (NRP)
One last company to add to this portfolio is Natural Resource Partners. Natural Resource Partners succeeds by collecting royalties from coal mines, aggregate lands, oil and gas properties. This way the company is not responsible for any problems that may arise from the plant. Natural Resource Partners has a focus on coal because the company believes 95% of America's energy is in coal mines.
One of the biggest reasons Natural Resource Partners is a strong company for a portfolio is the near 7% per year dividend. Along with the dividend, the company has been continuously growing for a long time. Because of this I am expecting the share price to reach an all time high later in 2011. This would not surprise me because the company has a business model similar to Domino's Pizza (DPZ). The idea behind the business model is; let others do the work and get paid a slice of the profits.
Companies to Switch
As investors are well aware, sectors tend to switch between strong and weak. Because of this I will give some good trades that will allow investors to keep a strong portfolio as the market shifts.
I left Pfizer (PFE) off the above list because the company has to deal with the FDA in order to produce new products. On the other hand, non healthcare companies do not have to deal with the FDA; which can sometimes delay products. Nevertheless investors that feel the urge to place Pfizer in a long term portfolio have a couple of ways to do it. The first way is to trade Pfizer for Exxon if you feel oil prices will steady off around $100 per barrel. This is a good move because if oil prices stay the same Exxon's profits will not increase and the share price will stay the same.
Second, investors could trade Pfizer for Natural Resource Partners if you feel Caterpillar is too similar. I recommend keeping Caterpillar over Natural Resource Partners. However in my opinion Caterpillar and Natural Resource Partners deal with completely different projects. In fact one could argue the partners of Natural Resource Partners need Caterpillar products to mine. Nevertheless the switch between Pfizer and Natural Resource Partners is the best switch investors can make because Natural Resource Partners relies on commodity prices that vary more frequently than the healthcare market.
There are several technology trades investors can make to gain access to other subsectors of the technology sector. While Apple has been a strong company in the past, I have always been weary of the company as it may peak then move right. First investors could trade Google (GOOG) for Apple as Google is continuing to close the gap on Apple in the cell phone and application market. Another trade could be EMC (EMC) for Apple because EMC has much more upside over the next 10-15 years than Apple.
Some speculate Apple will reach the 1000 level in that time, but I believe that price would highly inflate Apple's value. Also I would choose EMC over other cloud storage companies such as F5 Networks (FFIV) because EMC has more upside and greater innovative techniques. However, before trading for EMC it must be noted EMC's current CEO is planning to step down within the next two years.
Creating a diversified portfolio is a great way to increase your capital. It is a fundamental principle to avoid investing in stocks within the same sectors because that leads to every stock falling at the same time. Also, as you may have noticed I chose several dividend companies. Dividends are important to receive when creating a long term portfolio because dividends can add up over years and allow investors to purchase more shares with the dividends received.