The Bar Mitzvah Portfolio: Five Long Term Winners

My wife and I have been busy getting ready for our son’s Bar Mitzvah (the fourth of our five children) which will take place in June. We allow each child to buy a new computer with their monetary gifts and the rest I will invest in a portfolio of five of my favorite stocks as part of their college custody account. These five stocks are also amongst the top holdings for the client accounts at LakeView Asset Management, LLC and me personally. What follows is what I affectionately call the Bar Mitzvah Portfolio:

1. Apple (AAPL) – AAPL is not just an iPod company. AAPL iTunes is the largest site for digital downloads. The company is growing its core Macintosh desktop computer sales as more users continue to migrate away from the Microsoft (MSFT) Windows operating system platform. MSFT Vista operating system is such a disaster that it turns out to be the best marketing tool for the Apple Mac. For his Bar Mitzvah computer purchase my son and I went shopping for a Mac this week at the Apple store in the Short Hills Mall. We picked out a model as we now plan to take that first big step away from Windows. AAPL is making a move into home entertainment with Apple TV. Next to launch is the greatly anticipated iPhone. My guess, and this is only a guess, is that AAPL will develop its own video game system with digital download capability to compete against the Xbox and take more business away from MSFT.

AAPL 1-yr chart

2. Google (GOOG) – Google is set to report earnings today after the market closes and I expect the company to far exceed analyst expectations for EPS of $3.30 cents. This should come as no surprise especially as we know how strong the company’s business model is performing and how poorly Yahoo (YHOO) is executing after that company reported a disappointing quarter earlier this week. The best way to look at this relationship is in SAT terms. GOOG:YHOO as AAPL:MSFT. GOOG continues to expand its reach into advertising, the internet, and the digital media. Just last week GOOG announced that it would acquire DoubleClick and entered into a radio advertising arrangement with Clear Channel Communications (CCU). Expect this company under its very astute management team to continue to innovate and grow. A price of $600 in the next year for GOOG is not out of the question.

GOOG 1-yr chart

3. McDonald’s (MCD) – I have held this stock for several years. Despite the unexpected passing of two CEOs in a short period of time, the company continues to be the best managed restaurant chain in the world. You can credit: the deep pool of management talent; innovative menu changes; increased operating hours; turnarounds in Europe and Japan; and, expansion in China for MCD continued success. Just last week MCD surprised analysts and investors by guiding to significantly higher than expected 1q07 EPS and sales. On top of all this, MCD has a dividend yield of 2% which should get a boost later this year on top of a healthy stock buy back plan.

MCD 1-yr chart

4. Goldman Sachs (GS) – Oldie Goldie is the investment banker to the world. When it comes to investment banking, mergers & acquisitions, investment advisory, and sales & trading GS is the New York Yankees, Los Angeles Lakers, Montreal Canadians and Green Bay Packers all rolled up into one. It’s a proven winner. GS attracts the best talent, has the best stable of clientele, is well connected politically (in the US and abroad) and should attract your investment dollars.

GS 1-yr chart

5. Sears Holdings (SHLD) – I came upon SHLD many years ago when it was still Kmart not long after Eddie Lampert took it out of bankruptcy while I was doing my research into Martha Stewart Living Omnimedia (MSO) during the several months leading up to Ms Stewart's trial. I had correctly positioned our portfolios short MSO for a guilty verdict but also bought Kmart in the process. A few months later Lampert and Kmart gobbled up Sears turning the combined company into SHLD. I highlighted SHLD as one of the most compelling investments in a LakeView Asset Management blog entry last month. Recently Lampert put a plan into motion to harvest some benefits from its Kenmore, Craftsman and DieHard brands by securitizing those intellectual properties as part of a complex structured transaction. Expect Lampert to make some savvy acquisitions in the future. When people ask me if Lampert is the next Warren Buffet I always answer “No. He’s the first Eddie Lampert.”

SHLD 1-yr chart

Disclosure: At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of AAPL, GOOG, MCD, GS and SHLD -- although positions can change at any time.

Comments

[C. Prunkl]

Good Luck. Great long-term solution for a short-term problem and college tuition is just that - short-term. I'll assume that you have other funds available for tuition in the event that the economy tanks.

[hanache]

I agree about apple. And this just in:
Gartner Research is reporting that preliminary data on Apple's 2007 first quarter shows a 30% year-over-year increase in computer shipments. Interestingly, the last quarter of 2006 showed the same increase. With the most recent data, Apple's estimated US market share rises a full point to 5%.

[Michael]

This is a great post. I wonder what the Bar Mitzvah portfolios of your older children included and how they performed. Mazel Tov!

[DavidJackson]

Scott, excellent and thought provoking article; thank you.

I wonder whether the key factor in picking instruments for such a long term portfolio (I'm assuming you're not going to adjust the portfolio until it's time to liquidate it) is ensuring that your choices will maintain their competitive position 10 years from now. And while that might be the case for McDonalds, Sears and Goldman Sachs, I just don't have confidence that you can make that sort of call with tech stocks like Google and Apple.

A litmus test:

<b>What tech stocks would you have picked 10 years ago?</b> Perhaps Netscape or @Home. Remember them? Netscape was the clear leader in the browser market -- the future of the whole Internet -- and @Home was going to own the high speed infrastructure for the US internet. Definitely not Apple (look at the chart and what people were saying about it 10 years ago!) or Google (it wasn't public).

How did the tech stocks subsequently perform that "felt" as good 10 years ago as Apple and Google do today? Not well. This illustrates the challenge facing people who try to pick individual tech stocks for long term portfolios, described in more detail in The Problem With Tech Stocks.

Additionally, your portfolio is all US stocks. But GDP growth is currently and projected to be much faster in emerging markets than it is in the US. And with high US consumer debt, a chronic budget and current account deficit, it's not clear that exposure to the US consumer (Apple and Sears, and perhaps also McDonalds) in more than 2/5ths of the portfolio makes sense.

The bottom line:
- for a portfolio of this duration, I think you'd have much lower risk picking ETFs instead of individual stocks.
- once you're picking ETFs, perhaps you should allocate more exposure to foreign stocks than you have here.

David