Changing Up My Portfolio Positions For 2012

by: Brian Nichols

For the first time in two years I've decided to make some drastic changes to my long-term holdings within my portfolio. I believe that 2012 will be a year of large gains and that stocks with fundamental improvements and substantial loss will recover for large gains. My goal for 2012 is to reorganize my portfolio and increase my risk while also increasing my chance for gains. I've purchased several stocks in the last two weeks that I believe are priced much lower than its worth and will trade much higher in 2012. Therefore, I will be discussing a few of the changes that I've made and explain why I made the decision to reorganize 70% of my portfolio.

During the first quarter of 2009 I purchased shares of AT&T (NYSE:T) under $24. I knew that at $24 the stock was a bargain and that AT&T would recover as the smart phone industry was picking up steam. At the time I told myself that I wouldn't sell any of my shares for at least 10 years and decided to make the stock the largest company in my portfolio, at nearly 16% of my total portfolio. However, because of so many stocks being undervalued as a result of volatility I decided that selling my shares is the best decisions for the best possible gains.

I sold my shares of AT&T nearly 2 weeks ago at $29 a share and took very large profits. The company pays a great yield and has consistently increased its dividend year-after-year. But with increased competition in the communications industry I am concerned that growth will be difficult to achieve. And with the company's failure to acquire T-Mobile it seems like a no brainer to sell shares and invest in other areas that offer better opportunity for growth. With the proceeds from my AT&T investment I used 60% to purchase shares in The Kroger Company (NYSE:KR); 20% in Sprint Nextel (NYSE:S), and the remaining 20% to purchase shares of Dish Networks (NASDAQ:DISH).

I decided to invest more than half of the available funds into The Kroger Company because of my beliefs that the company will grow by a substantial margin in the next five years. When you stop and look at both stocks side-by-side I believe that Kroger is the better company for growth in the future. And although AT&T has a better yield, KR has increased its yield by 71% during the last five years compared to AT&T's 20% increase in the same period. Kroger has increased revenue by nearly $7 billion while AT&T's increased revenue by less than $1 billion during the last 12 months, compared to 2010. Both companies have reported less net income during the last 12 months, compared to 2010, however Kroger's loss is only $20 million and AT&T's loss is $8 billion with an additional $4 billion loss to be recorded for the failure to acquire T-Mobile. Yet despite the fact that Kroger's revenue is growing at a faster rate, along with its dividend; it's however the future direction of both companies that enticed me to make this change.

I've already stated that I don't believe AT&T can maintain its market share because of accelerated growth within the industry; however I believe that over the next several years The Kroger Company will make strides in competing with some of the larger retail companies within the market. Kroger trades with a valuation of slightly more than $14 billion which is nearly 13x earnings. However, the company is now trading with five consecutive years of growth; and is currently growing by its largest margin. I believe the growth can be explained by two strategic decisions that the company's made in order to compete with the likes of Walmart (NYSE:WMT) and Target (NYSE:TGT). The Kroger Plus cards, and others alike, have been a large contributor to the growth of Kroger. It gives customers the illusion of saving the most amount of money by actually seeing the difference in price of both using and not using the card. The decision to implement this service gives Kroger a great psychological advantage compared to others such as Walmart which has an everyday low prices slogan; but doesn't allow you to visually see how much money you are saving. The Kroger Plus cards are available to all Kroger shoppers and drive the consumer to purchase Kroger brand foods with additional savings. In addition it entices the consumer to continue shopping at Kroger with several rewards once a certain amount has been spent; some stores discount gasoline and others offer cash or a check paid quarterly. The choice to use the Plus card has probably affected the company's bottom line, however it has more people shopping at Kroger than ever before and is growing its revenue by the largest margin in many years.

The second reason I believe that Kroger will close the gap between the large retailers and itself is because of its expansion into the supermarket space. Up until recently the company was primarily a grocery store with some household supplies; however the company's making a switch and is becoming a more one-stop-shop for consumers, more like Walmart. These stores are much larger and include furniture, jewelry, decorative items, etc. with these items also being a part of the company's Kroger's Plus savings program. Kroger is growing twice as fast as Walmart with much fewer stores being opened, but because of its new changes more consumers are making the switch to Kroger with the illusion of higher savings. I don't believe that AT&T presents the same upside potential, and despite the fact that it's a great company I can't imagine that its growth can be maintained with so many companies gaining momentum within its industry. Therefore the switch to Kroger is a way to capitalize on a company that's growing rather holding a company near its potential.

Sprint Nextel is a communication company that I expect to grow and take revenue from AT&T during the next few years. Much like Kroger, I have several reasons for believing that this company presents the best growth opportunity within the industry. For one it's trading at nearly 50% of its book value per share while other stocks in the industry are trading at premiums of more than 100%. And while AT&T's margins are declining and its revenue growth is slowing, Sprint appears to be growing at its largest rate in many years. The company's margins have just recently improved, with a lower net loss, and its revenue is on pace to return gains after four previous years of decline. Sprint's advantage is its unlimited data plan which separates it from the competition and its upgrading its network to better compete with its larger competitors. However, the real reason for the switch from AT&T to Sprint is because both companies are now on a level playing field with Sprint's new luxury to capitalize on the hottest technology device in the history of communications: the iPhone! It's no secret that Sprint's been affected by its inability to sell the most sought after communications device within the industry. Before the news that Sprint would be selling the iPhone was announced the CEO had admitted that it had been affected and unable to compete with companies such as Verizon (NYSE:VZ) and AT&T (T) because of not selling Apple (NASDAQ:AAPL) products.

I believe that Sprint's falling stock price has presented substantial value in shares of the company. Sprint appears better positioned than it has in many years and although it may not achieve profitability in 2012 I do expect a couple quarters of net income and much closer margins for the full year. I see very few downside risks associated with Sprint, below $2.50 a share, and further believe that at its current price it makes an enticing acquisition candidate. In November I wrote an article in which I discussed Sprint as a potential acquisition and listed several companies that I believed may purchase Sprint, and of the choices I believe that Dish Networks (DISH) is most likely to acquire the company if it were to be sold.

I've owned a small position in Dish Networks since March of 2011 but nearly tripled my position after selling my shares of AT&T. Much like I believe Kroger will grow and increase its market share in the retail space I expect DISH to grow within the services sector. The company's most significant competition is Directv (DTV) which has a valuation of nearly 240% greater than DISH. However, both DISH and DTV have posted similar revenue growth during the last 12 months yet DISH is growing income by a much larger margin: including a higher profit margin as well year-over-year. During the last 12 months DISH has returned roughly 50% of DTV's revenue; yet returned 60% of DTV's total earnings and continues to close the gap with stronger earnings. Based on these facts DISH is approximately 1/2 the size of DTV yet trades with a much lower valuation; which further explains how undervalued DISH is trading compared to its largest competitor.

I am somewhat surprised that DISH is not trading as a momentum stock, high above earnings because of its recent developments. The company's CEO has already proved that he's willing to purchase and utilize troubled companies such as the recent acquisition of Blockbuster. The purchase of Blockbuster is a large reason that I purchased DISH; and I believe the acquisition separates the company from Directv, Comcast (NASDAQ:CMCSA), and even Netflix (NASDAQ:NFLX) since it offers a large variety of services that none of these, or other, companies can provide. The Blockbuster acquisition was relatively cheap and is now being used as part of the Dish Networks experience with mail order DVD's, Blu Ray, and video games for one low monthly rate. In addition to Blockbuster the company's CEO has already shown an interest in acquiring a communication provider and entering the industry. I believe if DISH were to acquire a communications company, such as Sprint, it could grow very large in a short period of time. Therefore I've bought DISH for two reasons: it has significant upside potential with the acquisition of Blockbuster and the company's CEO is more than willing to grow the company through acquisitions. And if the company were to add communications to its services and incorporate both Sprint and its current services then it could return unprecedented gains.

It's very possible that I could've held my shares of AT&T and returned a 6 to 8% return year-after-year. However, because of the market trading on European debt and disregarding fundamental improvements during the last five months I believe that 2012 is presenting a good opportunity to return larger gains with slightly higher risk. I believe each of the stocks that I've bought in place of AT&T present less risk than holding AT&T during the next five years, and I also believe that each of these stocks have the potential to return larger gains in one year than what AT&T could've returned in five years. Therefore I feel confident in my decisions and urge other investors to look at their portfolio and decide whether or not its time to take profits and invest elsewhere for larger gains. I will conclude by saying I've sold my positions in four additional long-term stocks, and purchased other stocks with higher potential, and I will be highlighting these investments over the next week in future articles.

Disclosure: I am long KR, S, DISH.