The Model Portfolio: Where Do We Go From Here?

Includes: AAPL, BKE, BODY, KMP
by: Stephen Rosenman

I'm going to take credit for a great call I made here at Seeking Alpha: Apple (NASDAQ:AAPL), Kinder Morgan Partners (NYSE:KMP), Buckle (NYSE:BKE) , and Body Central (OTCQB:BODY) , all are up since the article.

First, the quick background: In August, at the depths of the market's despair-- and mine, everyone was screaming "sell". The dreaded VIX had climbed to year highs. We were collapsing, for sure. Instead, I advised buying, not selling. I even offered selling an "investor straight jacket", designed to prevent hitting the sell button. If you'd bought the jacket and the four stocks, you'd have made a nice tidy sum.

The four stocks in the must-not-sell portfolio: Apple then selling at what now seems a ridiculous $376; Kinder Morgan Partners, then the absurd $68; Buckle at a discounted $35; Body Central at a mouth-watering $18. Each of these four is up substantially, on average 33% higher. The average stock in the S&P 500 is up 18%. Not bad-- just mine is so much sweeter!

To those who bought my investor straight jacket: Right now, I'm freeing you to sell. If you're a trader, this seems an awfully good time to take your profits. You'll likely be getting better prices to reenter Kinder Morgan, Buckle, Body, and even my beloved Apple. I'm freeing you-- take off the investor straight jacket if you want.

But, what the heck, I'm no trader. I hold onto companies I believe in. I like all four companies' prospects going out, although I do see a pull-back in each. And I just might start adding to my positions if their prices come down.


Apple: The most undervalued stock on the planet, selling for a measly PE of 14 despite growing revenue by 66% and earnings by 83% in FY 2011. And both sales and income growth accelerated last quarter. Any faster and Apple just might get a speeding ticket! Next year the stock should take out $650, and it still would be undervalued.

Kinder Morgan Partners: The only thing certain in life is tax, tax, and more tax. Come December 31, we're likely to say good-bye to favorable tax dividend treatment. Your 15% taxable rate on Coca-Cola gets replaced with a chunky ordinary rate: For the well-healed, that means a 36% bite. Kinder Morgan, on the other hand, is tax-advantaged: The bountiful 5.29% distribution avoids taxation until you sell. And management is good: They've been delivering increasing distributions for 17 years.

Buckle: Management operates this young adult retailer conservatively. Nothing crazy. Just slow, deliberate, steady, reasonable expansion-- and all the while, profitable. Even more exciting, they have been handing out large special dividends for the last 4 years. Just about all the cash not put into capex comes back into shareholders' pockets. With the end of the 15% favorable dividend tax treatment, it's reasonable to expect a particularly generous special dividend prior to year's end. Who knows? Maybe $3 to $4 on this $43 stock.

Body Central: Very little talked about young women's apparel retailer that is expanding 15% in store count each year. The company has no debt, rising revenue and earnings, and improving margins. Of the four, this is the most likely to double. It's also speculative: It could crater as well. But, what the heck, everyone needs a little bit of excitement.

Long-term these guys look good. However, short-term things may get bouncy. We're overbought and the volatility looks ready to explode. Good luck, out there!

Disclosure: I am long AAPL, KMP, BKE, OTCQB:BODY.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.