The Lullaby Portfolio

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Includes: AXP, FB, GSK, HFC, LXRX, NEP, SEDG, SNY, T, WFC
by: Alternative Analyst

Summary

2015 was a tough time to show gains and most investors lost money for the year.

Did you invest in bargains only to watch them become even better bargains?

Are you looking for value and growth potential with some level of safety?

This portfolio contains value investment opportunities that shouldn't keep you up at night.

2015 was the worst 12 months in nearly 80 years to make money investing in assets. If you lost money, you weren't alone since nearly 70% of investors lost money last year. Financial and healthcare stocks have been dropping since early 2015 and technology indexes were flat at best. If you sat on energy investments through the year you might be among the worst victims of asset decline. With negative interest rates announced by the Bank of Japan, many feel that simply holding on to capital value would be staying ahead of the game.

Are you lucky enough to still have dry powder? Do you have new money looking for a home? Be careful with buying the cheapest stocks. Most discounted stocks that were making headlines last year for being undervalued, went on to become even cheaper while paying the investor nothing for holding the declining shares. In addition to buying value, why not collect paychecks from a few companies as a reward for risking investment while also seeing an increase in share prices.

This article provides a brief list of companies with reasons for share price growth potential and most will even pay you a dividend while you wait. Although some risk is suggested, this group could show a decent return on investment without the need for sleep medication.

Financials

Wells Fargo Bank (NYSE:WFC). Currently trading at less than $49, this bellwether is well off its highs and the valuation looks good. The sell-off happened in spite of showing solid revenue and profits for their most recent financial report. They have strong cash holdings and book value is in the mid $30's plus they want to pay you a moderate dividend (3%) for holding shares. As Mr. Buffett's number one holding at Berkshire Hathaway you will be in good company as a shareholder.

American Express (NYSE:AXP) The market has over-punished this one because of the Costco fiasco that sent shares back to levels not seen in four years. In spite of the significant share price drop to below $54 from a 2015 high in the $90's, patience may provide even better entry before turning around. Amex recently showed a strong revenue report and a healthy cash balance and pays a better dividend yield than Mastercard Inc. (NYSE:MA). The attention to the Costco deal combined with painful share price declines have likely motivated AMEX to step up the urgency to deliver new partnerships in 2016. This would restore market confidence and improve share price all the while paying shareholders a better than 2% dividend while waiting. This is Mr. Buffett's number 2 holding in Berkshire.

Healthcare

GlaxoSmithKline (NYSE:GSK) GSK has shown consistent year-on-year sales growth for five years and is not overly dependent on the prescription drug market. Revenue from their OTC consumer healthcare portfolio has grown by about 50% in the last year. The share price of this British number one maker of global consumer healthcare products climbed from the mid $30's to the mid $50's in five years while total sales grew better than 30%. GSK has consistently issued handsome quarterly paychecks to shareholders. The dividend payout has held above 5% yet share price is currently in a healthy pullback to below $40. Prospects of new leadership and asset restructuring could spring this old lad back to the $50's or better within 12 months.

Lexicon Pharmaceuticals (NASDAQ:LXRX) This is really more of a biotech and carries a bit more risk than Big Pharma but has greater growth potential. With good debt ratios and the already solid revenue from their existing portfolio, it wouldn't be bad to buy this simply on its current growth numbers. But the frosting on the cake was their agreement last Fall to latch onto the powerful marketing of Sanofi for an anticipated 2016 launch of their new type-2 diabetes glucose transporter. Diabetes is a fast growing disease state and treatment is not optional. This new product could easily translate into explosive growth for 2016 and beyond. No dividend is needed here, just look for a possible doubling of share price back to the $20's by year-end 2016 or early 2017. Acquisition by the usual suspects could mean even better return on today's sub $10 investment. For a somewhat reduced risk on this play, put a portion of this allocation into Sanofi stock (NYSE:SNY). Shares of Sanofi are off their recent highs from the mid $50's and are now near $40. Why not collect a 3.9% dividend from Sanofi while watching the diabetes treatment launch and enjoy the share price recoveries of both players.

Energy

Energy is a tough sector since many renewable share prices could linger for months or even years right along with fossil fuel prices. Although many, including myself, feel that the mid $20's was our near-term low for WTI crude, energy sector investments should continue to see a long bumpy ride even when picking healthy companies that are dividend payers. Even harder to find are healthy renewable energy growth investments that pay dividends. Although my personal preference is to avoid non-renewables, I include one refiner as I feel it represents good investment potential.

NextEra Energy Partners (NYSE:NEP). A green option for earning a dividend in a growth energy stock, NextEra is a limited partnership formed to acquire, manage and own contracted clean energy projects. They recently announced that they would begin paying a quarterly dividend and their first ex-dividend date is February 3rd. Their revenue and earnings growth have been strong since 2012 and they just beat the street on January 28th reporting earnings of $0.46 per share on a consensus of $0.38 for Q4 2015. Share price has suffered not only from low fossil fuel prices but also on the expectation that Federal Incentive Tax Credits (NYSE:ITC) for renewables would expire at the end of 2016. NextEra shares may benefit from both a bottoming in crude prices but also from a recent extension of the ITC. Avondale Partners just reiterated a "Market Outperform" for NEP and Deutsche Bank and Barclays both raised their price targets helping to move the consensus price target up to $35. At the current share price of less than $27, you can enjoy a better than 4% dividend yield. The risk with this one is a debt ratio over 200 but profitability and strong growth numbers are a good mitigation to the debt risk.

SolarEdge (NASDAQ:SEDG) Although a relatively high-risk value play, this debt-free company is a maker of intelligent power inverters for the production and storage of solar energy. SolarEdge has a product price advantage over most of the competition and has consistently shown robust year-on-year sales growth. No dividend is offered here, just strong growth potential thanks to partnership agreements with key players like Tesla and SolarCity. The company is poised to reap a solid growth advantage as a result of a strong demand for the Tesla Powerwall. In May of 2015, 38,000 of the energy storage units pre-sold within a week of announcement. They are distributed through SolarEdge who was also selected to make inverters for the devices, which begin installing this year. Additional growth for SEDG comes from a growing number of customers who prefer to lease a solar system from SolarCity and other principal installers rather than come up with the money to purchase one. Other positive catalysts for the solar sector are the recent extension of the Federal ITC as mentioned above, pressure on utilities to continue allowing net metering as seen recently in California, and the likely bottoming of global crude prices. Current share price is under $27. Although the 12-month consensus target is only in the mid $30's, market advantages may provide surprising sales numbers moving forward.

HollyFrontier (NYSE:HFC). This is the least environmentally friendly option in the portfolio but HFC is primarily a refiner so they are enjoying low oil prices and have maintained positive margins through the plummet in crude prices. The market hasn't cared and has crushed the share price in sympathy with the producers. When riding the energy roller coaster, survival is key and remember that much higher dividends in this sector often means higher debt and higher risk. HFC Share price has fallen to about $33, which is close to book value. They have a healthy cash balance, less than a tenth the debt/equity ratio of producer Chesapeake Energy Corp. (NYSE:CHK), half the debt/equity ratio of refiner peer Valero Energy Corp. (NYSE:VLO) while paying a better dividend than either. Entry into HollyFrontier at current levels pays close to 4% dividend and the yield is likely sustainable thanks to profitability. A gradual recovery in crude prices could send shares back to $50 within 12 months.

Communications

AT&T (NYSE:T) Verizon and AT&T are both pretty safe picks moving forward and Mr. Buffett seems to agree since they are each key holdings in Berkshire. AT&T is among the fortunate investments that managed to gain value in 2015 and has a better debt/equity ratio and more robust sales growth than Verizon while Verizon holds slightly better margins. Bottom line are growth, dividend yield and price-to-book ratio. At $36 per share, these advantages give AT&T a solid edge. Why not collect better than 5% dividend while the share price valuation catches up to the superior performance in revenue growth.

Internet

Facebook (NASDAQ:FB). While I like the Linkedin (NYSE:LNKD) product, the cat is now out of the bag for the ability of this social media superstar to show a healthy profit and strong growth in mobile revenues. Triple-digit revenue growth, good guidance and virtually no debt combine to make Facebook a value play. They don't pay a dividend, yet, but when share price valuations finally catch up to the more lackluster growing Linkedin, you will have a better than $200 stock.

Currency

Cash U.S. ($) It goes against the nature of many investors to let money sit idle but don't forget that cash is a relevant position for investment and trading. The cash will not only be useful for that inevitable opportunity, but an investment in shares of the greenback have held value better than most indexes over the last 12 months so keep a portion of the lullaby portfolio in dollars. Canadians who held U.S. currency have seen double-digit returns in the last year. When energy, particularly oil, finally shows signs of a reliable bottom, the U.S. dollar may become less attractive of an investment for our neighbors to the north.

Portfolio Risks

There are certainly risks moving forward with any investment in stocks right now. The Fed interest rate changes and the potential for deflation have been known to negatively affect the share prices of financial stocks. As oil prices stay low, market indexes appear likely to mirror the continued volatility in energy markets. Cheap energy, negative growth in the Chinese, Japanese and other global markets can continue to keep our U.S. indexes anemic for at least the near-term. Changes in the political environment and healthcare regulation can affect the ability of healthcare manufacturers to control profit margins or make it difficult to launch new products into tightly controlled markets particularly for manufacturers that are heavily dependent on revenue from prescription medicines. On the economic bright side, since 2012, the Eurozone has been quietly showing signs of recovery along with auto sales and consumer confidence. China has always been more of a seller of goods than a buyer, so many feel that an economic slow-down in China simply reduces the cost to produce goods there, thus improving profit margins for some manufacturers. The bulk of this portfolio focuses on industry players that will likely see continued demand even in a lackluster economic environment.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SEDG, NEP over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.