A Not So Lazy Portfolio

by: Roger Nusbaum

The lazy portfolio concept is intriguing on different levels. The blending of assets is interesting as is the idea of getting from here to there with the least amount of work possible. The opposite of a lazy portfolio might be some sort of frenetic day trading procedure. That leaves a lot of room in the middle for all sorts of strategies.

Personally I am not a fan of a truly lazy portfolio for my money but there is merit. I thought it would be fun to put together a not so lazy portfolio of individual stocks with a defensive overlay. We don't own any of these stocks but we do own some names that are similar. The idea with these stocks is there is very little likelihood of a blowup, they are generally well run, not that there aren't occasional problems - but of course the fortunes of any company can change at any time for any reason, which is where the defensive overlay will come in.

I dug up one name for each of the ten sectors, tilted to yield and with plenty of foreign. Only one stock for each sector makes for a poorly diversified portfolio but can still be an interesting blog post (hopefully).

Tech -- Seagate Technology (NASDAQ:STX)

Seagate has been around for a long time and has matured into a low debt high yielding stock. It currently yields 3.8% and has a mid single digit PE ratio. Certain parts of tech have become sources of serious yield in the last few years. Seagate popped up a few weeks ago in a favorable Barron's piece. Despite the yield the name is still fairly volatile. It was having a great 2012 but then started selling of aggressively as the market has been rolling over in the last month

Financials -- Westpack Banking (NYSE:WBK)

This is one of the four big Aussie banks. We sold our Aussie bank about a year ago on concerns over an overheated housing market. As a trade it looks OK as both it (OTCPK:ANZBY) and Westpack are down 15% but I would not say the housing market has had serious trouble. WBK focuses much more on the domestic Aussie market than ANZ. A big near term risk is the extent to which Australia has become a magnet for recession expectations -- its yield curve is inverted which is a warning sign. At this point WBK is down 17% from its recent high and has a trailing yield of 8.2%. WBK has a good track record of raising dividends but if earnings drop then so will the dividend.

Healthcare -- Abbott Labs (NYSE:ABT)

ABT is a big diversified health company that everyone has heard of. It is usually very popular with dividend investors for growth but the yield isn't that high at 3.28%. At times ABT is a top performer and sometimes it lags which is similar to most of the big cap U.S. pharma stocks. The company has six disparate business segments that you can learn about here. The cash flow multiple is good and the debt is low. I prefer other names but there are no obvious red flags that I can see.

Staples -- Altria (NYSE:MO)

This might be the easiest one to come up with for this sort of exercise. The longer term risk is declining smoking rates in the US. For now though, the stock does well and yields 5.1%. The company does have a fair bit of debt but not enough to choke on in my opinion. Growth is still positive but is modest. At some point growth could stop but I don't believe that will be the case for quite a few more years but whenever growth stops the name would become a sell.

Discretionary -- McDonald's (NYSE:MCD)

This is also a fairly easy one. It yields 3.1%, the balance sheet is is good shape but it is a little expensive. MCD is interesting because like some mega cap tech companies it has evolved into being a dividend payer. Everyone knows the extent to which a lot of the menu has been unhealthy but also the extent to which parts of the menu continues to evolve to meet demand for some healthier choices. Menu evolution will have some hits and some misses but makes the case that the company can continue to do well. Obviously it has an ever increasing global footprint as well.

Energy -- Petrochina (NYSE:PTR)

China is tough to own via a broad ETF because quite a few of the sectors, like financials, are better to be avoided. Energy is one that I believe can be owned. Similar to other segments, the Chinese majors seem to take turns being the top performer; the other two being CNOOC (NYSE:CEO) and Sinopec (NYSE:SNP). This might be a good time to buy the name as it is down 14% from its February peak probably due to concerns about a hard landing. If a hard landing comes then it will go down more and the current 3.6% yield won't help much. It is cheap; trading below its revenue and with a mid single digit PE ratio.

Industrials -- Lockheed Martin (NYSE:LMT)

This name seems easy to forget about but it has a single digit PE, a low net debt load, yields 4.8% but growth for the time being is estimated to be middling at best. This is one of the big American defense contractors. The entire group will always face political threats but the primary products will always be needed and there must always be innovation with these companies. We own another defense contractor and it seems like they all take turns being the top performer.

Utilities -- Utilities Sector SPDR (NYSEARCA:XLU)

Why not use at least one ETF for this post. XLU is domestic large cap oriented. It has a trailing yield of 3.88%. XLU represents the utilities stocks in the S&P 500, it is generally going to be a defensive position so it will probably lag when the market is doing well and be a top performer in a downturn. The biggest risk looking forward would be higher interest rates. Interest rates are at about all time lows and whenever they turn up it will be a drag on this sector.

Materials -- BHP Billiton (NYSE:BBL)

BBL is the ticker for the UK ADR not the Australian ADR. BBL yields 4.1% versus 3.5% for BHP. Over the last year BBL has outperformed by 2.4%. The trailing 12 months has been bad with a 32% decline but it has been rough going for the much of the mining group. This is obviously a mature company and when things are going well for miners then BBL (and BHP) will do well without being the best and when things are going poorly it will also do poorly although probably won't be the worst. Growth estimates are pretty good and the PE is a little over six. Six is low but not out of line low compared to other big miners.

Telecom -- Telenor (OTCPK:TELNF)

Telecom is probably the easiest to add a foreign stock because so many countries have a large company in the sector. Telenor is from Norway, it has low debt compared to the big three U.S. telecoms. It yields 5.6%, has a decent global footprint, good growth estimates but the name is volatile. It has dropped recently by a noticeable amount and it would probably continue down more if the recent sell-off continues. Some of its foreign dealings are complicated, especially with Vimpelcom (NYSE:VIP).

The above mix is obviously a large cap combo but as noted the objective was managerial track records with a skew toward dividends. These traits are harder to find with small cap stocks. The lazy aspect is that the companies are fairly steady even if the stock prices can be volatile. Anyone able to think long term can probably hold onto these names. ride out the occasional storm and be ok.

As also noted above, one objective is a defensive overlay. I've written a lot about defensive action when the S&P 500 goes below its 200 DMA but of course another version is heeding the 200 DMA for each individual holding. This won't get you out at the top but I believe would be very effective on the way toward cutting in half. Someone wanting to be more tactical could also sell when a stock gets too far above the 200 DMA and buy when it gets too far below the 200 DMA as an add on strategy.

One obvious caveat is alluded to with Altria which is any long term story can end. The story for MO ending seems to have the most visibility now but that could change at any time for any name. A mix like the one above which is a large cap dividend oriented combo is very unlikely to ever be up 20% in an up 5% or up 10% world but the extra yield and the quality of the companies (if they are quality) could compound over time to outperform as could effective use of a defensive strategy.

In the real world an entire portfolio of companies with the same attributes does not make for the best diversification in my opinion but it still can work, especially for people who save adequately.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.