If I learned anything from last year, it is that a well diversified portfolio is a must. So far this year, that has been the approach that I have taken. The odd things is, before this year you would have never have heard the word “diversification” come out of my mouth. It has always been something that I thought was highly overrated to the extent that the term could never truly be defined. But that was only partly the reason.
The major reason was simple, I figured, why should any portion of my investing capital be devoted to stocks that I feel are least likely to succeed – only for the sake of diversification? If I really love a stock like Apple and know that it is going to surge, it puzzled me that I should allocate (any portion at all) to buy company-X because that has been the “prudent” thing to do. That logic has been one that just never sat well with me. But that was last year and seeing how my portfolio didn’t fare so well, I’ve decided to put to rest some old ways of thinking. While 2011 was the year of the rabbit for the Chinese calendar, for me it was “the year of the regret."
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“New focus and having perspective” continues to be my mantra for the New Year and with that, the chart above continues to serve as my reminder of the effects of poor decisions. Because what I thought I knew in terms of my investment philosophy didn’t deliver the results needed to justify maintaining the old ways of thinking or “myths” as they are now called. So as I seek to diversify my portfolio, here are seven stocks that deserve six months to make me rich – rich in understanding that is, because the better that I understand my portfolio, the better long term growth it will deliver.
Any portfolio worth assembling is worth having an anchor such as Apple. I recently called it the hand that rocks the cradle – of the competition, that is. Because it is so good at being shrewd, that advantage alone is worth an extra double digit percentage to its market cap. While the company forces others to play catch-up or “Simon says," Apple is using this advantage to widen its lead in any market that it chooses. What nobody has been able to answer is, what is Apple worth? This question leaves me scratching my head because it is akin to being handed a blank check where I’m told to write whatever I want and make it out to me. Essentially, owning Apple is receiving a blank check or as they say in the market, “having an option without expiration.”
The reason being, I don’t think anyone can realistically say that the smart phone market has peaked. If Apple can achieve roughly 12% to 15% annual revenue growth for the next couple of years, the company will be able to generate almost $180 billion in annual revenue. Just imagine what that means for a second. Assuming a declining ratio of free cash flow conversion, Apple could end 2015 with nearly $39 billion in free cash flow. Assuming 6% cash flow growth beyond that, a market-matching discount rate, and adding in the cash on the balance sheet, suggests a target of at least $650. But for the time being, I’m raising my near term target from $520 to $550 – albeit, still very conservative.
Sirius XM (SIRI)
Sirius XM is priced to move. What that means is that due to its pent up demand, the stock can pop at any time during the course of the next several weeks. This is no revelation, I know. Because the fact of the matter is, the stock has been priced to move for the last three years, and that’s exactly what it has done. It has been an integral part of my portfolio during that time – to the extent that it has outperformed several of the more prominent names. Yet it does not generate this same level of respect on Wall Street.
In my humble opinion, the stock and to some extent the company continue to be the victim of what I consider a lack of understanding. There are many skeptics who still do not fully appreciate the story that is Sirius XM. Incidentally, there are many longs that fall into that same category. But whatever your motive is for having an opinion on the situation, there are certain things that can’t be disputed - the company has recently put together a string of quarterly performances that rivals that of any other stock on the market – not named Apple.
While Sirius continues to show clear signs of recovery, it is burdened with the memory of its brush with bankruptcy a couple of years ago. As a result, there are many who are unwilling to forgive much less stick their neck out and give it another chance. But remarkably, that doesn’t matter. Investors with an appetite for risk and growth should consider Sirius for their portfolio but should first seek to understand what it is and what it is not.
Bank of America (NYSE:BAC)
There will be many who will be surprised that I have “warmed up” to the idea of acquiring Bank of America – and this is understandable considering my recent remarks regarding its state of affairs. But to be fair, I have been down on the entire financial sector as a whole. I think the chart above does a decent job of explaining why. But something happened recently regarding BofA that caught my attention - it convinced me that it has recently reached its bottom.
Since reaching a new 52 week low of $4.92 on December 19, the stock has surged 35% to where it rests today, comfortably at $6.63. I can now say that it no longer trades at a price of a Subway $5 foot-long – a remark that I once used that drew the ire of its investors. Although it is still plagued by a rash of recent poor decisions, today there are several things working in its favor. But more than anything, it would seem that all of the bad news is now out of the way.
For investors, it would seem that the upside potential now far outweighs the downside risk. That in of itself supports a decision to go long the stock, especially considering that it holds the distinction of “too big to fail.” As with Apple, for BofA, I continue to struggle with the question of what is it worth? At the moment, that question can’t be answered with any certainty, but it is safe to say that it is worth more than its current valuation and should be considered for a portfolio that not only has the ingredient for risk but also a lot of patience.
Wal-Mart is one very interesting company. On some levels, I have never viewed it as an individual stock, but more as an ETF or even a mutual fund. You walk into any of its stores and you are likely to pick up any item from several other large publicly traded companies on Wall Street. While it has never been the growth story its online rival Amazon (NASDAQ:AMZN) has become, Wal-Mart has always been a safe stock for any portfolio because though it will not impress you, it will not disappoint either.
Discretionary spending and consumer staples stocks yielded a respectable 4.4% and 10.5%, respectively, in 2011. I will concede that I would never “write home” about that performance, but it didn’t generate many margin calls from my broker. I said recently that Wal-Mart stands to outperform the first couple of quarters if not for the year. The reason for this optimism has (in part) to do with the concern over rising oil prices – which if you have not noticed have already started.
Any time discretionary spending becomes a concern, it often bodes well for retailers that focus on consumer staples such as Wal-Mart. Remarkably the company continues to get overlooked when some of the best companies on the market are mentioned. This is even though its shares have returned nearly $7 in dividends. Wal-Mart is not likely to ever excite anyone with its growth again, but it continues to be a very reliable stock in any type of market.
Exxon Mobil (NYSE:XOM)
I’m mentioning Exxon here for a couple of reasons. First and foremost, in addition to producing the key energy driver that is oil and gas, the company is a cash producing behemoth. But with respect to building this well diversified portfolio, you can see that it is now anchored with Apple as the top two largest companies in the world according to market cap.
Though the company often gets overlooked for what appears to be routine success, there is a lot to like here and it often gets taken for granted. It has huge reserves and plenty of capital which often is an appealing quality to conservative investors. Not to mention that it has a well earned reputation – something that many of its competitors are working hard to rebuild.
Investors should keep in mind that Exxon Mobil is still a dominant player even among the big oil companies. It has nearly three times the market cap of even the other oil giants, but it is hardly a lumbering, stumbling giant. The company is still in the mix of all phases of upstream and downstream operations, and its portfolio of exploration and production projects should make it able to continue to weather these lean times.
Boston Scientific (BSX)
One of the best turnaround stories in the healthcare sector continues to be that of Boston Scientific. The company is one of the leading producers of medical devices that are used in a range of interventional medical specialties. Its main challenge centers on trying to secure better and decent footing in the drug-coated stent market vacated by Johnson & Johnson (NYSE:JNJ). Many analysts became optimistic of the company when JNJ conceded the market, but Boston Scientific have been unable to prove that it can win in the market.
This is a bet that I am willing to place on a stock that is now trading at $5.30 and only percentages away from its 52-week low. The company needs to show that it can execute and reduce some expenses. That is not often an easy request for firms that rely heavily on R&D. Having said that, with the prospects of this sector as well as my willingness to wait it out, I am inclined to add at current levels.
Abbott Labs (NYSE:ABT)
In a recent article, I talked about how I regretted not having invested in the healthcare sector during 2011. In 2012, that is going to change. The reality is healthcare appears to have grown at a faster rate than the economy and seems poised to continue to do so. I am inclined to look at adding Abbott Labs. This is odd for me because I typically do not buy stocks at 52-week highs, however I don’t see any evidence that the stock is poised to slow its growth.
The company obtains a great portion of its profits from pharmaceuticals. Nevertheless, it is one with excellent long-term growth characteristics and compelling drivers for future growth. The company's new stent platform is capturing share from the rest of its peers and I believe many investors under-appreciate the quality and growth potential of Abbott's diagnostics franchise. With a solid long-term record of cash flow growth, a good return on capital, no major patent issues and manageable debt, I believe dividend-seeking investors stand to benefit a great deal from the standpoint of excellent income and tremendous growth.
While I use to go by the notion that portfolio diversification was overrated, I realized that my error in judgment was not appreciating what true diversification was. And I think this is also the mistake that several other investors continue to make. In this portfolio, I have covered stocks from six separate sectors and I plan to give them six moths (or two quarters) to make me rich – or in this case, prove to me that diversification works.
Additional disclosure: Author may initiate a long position in AMZN, XOM, BSX and ABT at any time.