Crash-Proofing A $100,000 Portfolio From A European Crisis With These Companies

by: Chris Lau


The absence of the formation of a lender of last resort in Europe is causing global economies to slow. Companies are mitigating risk by putting off major investments or roll-outs, trying to guess the cost of inaction should Europe’s banking system collapse.

It was only a month prior to the Greek crisis that market participants focused on the U.S. The failure by government to jointly decide how spending cuts would be implemented must still be addressed during the 2012 elections, and implemented in 2013.

An ideal approach for investors to manage their buy and sell actions is to first create a virtual (a “practice” or simulated) portfolio to be done concurrently with real money. There are two benefits with this approach. The first is that investing ideas at the company level may be tested with one or more practice portfolios before real trades are implemented. The second benefit is that an investment strategy may be validated first in a virtual environment before any real money is lost.

A virtual portfolio differs from a watch list, because incremental purchases and sales may be made easily. Most watch lists will only record an initial price and share amount.

In this discussion, a portfolio created in (also a contributor) in the amount of $100,000 since July 2010 is discussed in further detail.

Results: 29% Total Return

2010’s Quantitative Easing pushed markets higher, and stock holdings versus cash rose as stocks were sold. By early 2011, it became apparent that the benefits of temporary easing would wane.

Uncertainty continued throughout the rest of the year, making it very difficult for investors to manage make a full commitment to any one holding.

Total Virtual Portfolio Return
(Click to enlarge)


The strategy used to maximize gains between 2010 and mid-2011 was to buy and sell into positions on a number of companies. The thesis was that stocks would move side-ways. By April 2011, it was apparent that sentiment reversed, at which stocks were sold incrementally. The portfolio currently has the majority of its holding in cash.


Scored with a Sector Diversification Score of 36%, the stock positions are allocated to:

  1. MEDICAL 49%
  2. OILS/ENERGY 47%

Change in Cash Balance:

(Click to enlarge)

Current Holdings




BP Plc. (BP)



Breitburn Energy Partners LP (BBEP)



Chesapeake Energy Corp (CHK)



Cliff Natural Resources (CLF)



Gilead Sciences Inc. (GILD)



Golden Minerals Inc. (AUMN)



Liberty Interactive (LINTA)



Microsoft Corp. (MSFT)



TD Bank (TD)



Valeant Pharmaceuticals (VRX)





Holdings Discussed:

1) BP PLC.

BP shares were accumulated in the virtual portfolio on December 2010, and then sold as shares rallied. By April, a large position was sold, and a position re-established in October. When BP rallied again, shares were sold between October and November.

Below is a graph showing the buys (“B”) and sells (“S”) in BP:

Virtual Trading Log for BP Plc.
(Click to enlarge)

2) Breitburn Energy Partners LP

Breitburn is a core holding in this portfolio and pays a dividend of $1.74 per share. This is a yield of 10.08%. The company reported solid results in its most recent quarter and exposes investors to positive cash flow from natural gas and oil operations.

3) Chesapeake Energy Corp

A small position in Chesapeake Energy was initiated at $30. Until the macro environment is more favorable for growing demand in energy, there is little reason to hold a larger position. Over the longer-term the objective is to build a heavy weight of up to 10% of the portfolio.

4) Cliff Natural Resources

Cliff Natural Resources has a P/E of just 5.15. Ongoing short-term declines in global demand will hurt Cliff. The company will be a core holding for this virtual portfolio over the next few quarters, as evidence builds for stronger demand for raw materials. The objective is to build a heavy weight in Cliff Natural Resources.

5) Gilead Sciences Inc.

Gilead trades with a P/E of 11.23 and closed recently at $39.01. The stock is expected to face integration risks with its recent acquisition in the short-term. The company represents nearly 10% of the stock holdings in this portfolio.

6) Valeant Pharmaceuticals

Similar to Gilead, Valeant shares moved up quickly since the summer. Valeant is also growing by acquiring, but management is more prudent with its product acquisitions than Gilead. Valeant is up 69.17% from a 52-week low, suggesting that upside to share price is limited.

7) Others Holdings: Microsoft (NASDAQ:MSFT), Liberty Interactive (LINTA) and TD Bank (NYSE:TD)

To remain disciplined in tracking these companies, a small position was added in these companies.

Within the financial sector, there is currently minimal upside for holding a long position in any company here. The only upside involves a surprise announcement for quantitative easing, or unexpectedly strong growth in loans or housing. All events appear unlikely. The odds are greater that Europe will not be able to co-ordinate its efforts.

Once the cloud disappears, TD Bank (in Canada) is the most attractive bank holding to build over the long term.

Microsoft is a long-term value position that pays a dividend of around 3%. The Nokia-Microsoft mobile phone faces stiff competition. Windows 8 is off to a good start, as Metro UI well-received when it was unveiled in a beta release.

Liberty Interactive is currently undervalued. It offers investors exposure to the consumer television shopping space.

Disclosure: I am long BBEP, MSFT. I may initiate a long position in CLF over the next 72 hours.