The No. 1 Stock In The World (Revisited) - Apple Up, Realty Income Down

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Includes: AAPL, BRK.B, BTI, CCP, CTSH, CVX, DIS, GILD, HON, JNJ, KMI, KO, MDT, MO, NSRGY, O, RAI, SCHD, SPY, STAG, V, VDIGX, VIG, VTR, XOM
by: Mike Nadel

Summary

A two-year review of the May 2015 stock selections by a Seeking Alpha panel.

Apple, beaten down in Year 1 of this collaborative project, had a heck of a comeback.

Realty Income didn't fare as well in Year 2, but it still had a market-beating 2-year gain.

Gilead Sciences hit the skids again.

Two years ago, millions upon millions of investors were gobbling up shares of Apple (NASDAQ:AAPL), which hit its then-all-time (split-adjusted) high of $132.54 on May 22, 2015.

That also happened to be the date used to establish prices for a collaborative effort that resulted in a three-part series called The No. 1 Stock In The World. For the project, I asked 15 Seeking Alpha contributors and frequent commenters to answer two difficult questions:

1. If you could only own one company in your portfolio, which would it be?

2. If you had $25,000 to invest TODAY on one company and you planned to hold it for 10 years or more, which company would you buy?

Question 2 was the subject of Part 2, and SA contributor Eddie Herring chose Apple. Here's what he said back then:

"I cannot separate this question from the requirement that the investment is being made today. That means that I have to account for valuation of the company today; I simply cannot invest in a company without being mindful of valuation. And because of the bull market of the last few years, many companies I might typically consider are overvalued. I want a company that is no more than fairly valued - and preferably undervalued - and again with a moat, excellent fundamentals, a business I can understand, good growth potential and strong cash flow. The dividend does not have to be currently at a high yield, but it does have to have the potential to increase over the next 10 years. So, if I had to pull the trigger today, it would be AAPL."

A year later, I revisited that series and noted that Eddie couldn't possibly have known that Apple had nowhere to go but down. The table included in that article showed that AAPL's price had fallen to $95.22 on May 20, 2016 - and that even with dividends reinvested, a hypothetical $1,000 investment in AAPL would have been worth only $733. Yikes! A 27% decline in the world's biggest company!

Nevertheless, because I'm such a nice guy, I threw in a line saying: "Apple still might end up being a terrific 10-year choice."

Turns out, AAPL was a pretty terrific 2-year choice.

In the year since my last look at that series, Apple's share price has gone up, up and away. By February 2017, it had established a new high, and it went on to top itself again and again and again, finally hitting $156.65 last week. On May 19, the date I looked at prices for this update, AAPL closed at $153.06.

That 63.8% movement easily put Apple at the top of this project's Year 2 gainers, and it brought the company's 2-year advance to a market-beating 20.1%.

It wasn't quite the Cleveland Cavaliers erasing a 3-1 series deficit to overcome the Golden State Warriors in the 2016 NBA Finals, but it's an impressive comeback for AAPL, nonetheless.

Other choices by our panel that also had big rallies: Tim McAleenan's Nestle (OTCPK:NSRGY), which went from a 2.8% loss the first year to a 19.3% gain in Year 2; Nicholas Ward's Disney (NYSE:DIS), 8.4% loss to 9.4% gain; Berkshire Hathaway (NYSE:BRK.B), selected by Tim and Adam Aloisi, 1.9% loss to 15.1% gain; and, yes, even Bob Wells' beleaguered Kinder Morgan (NYSE:KMI), which moved up 12.6% in Year 2 after tumbling 56.5% in Year 1.

Unfortunately for holders of Gilead Sciences (NASDAQ:GILD) - including yours truly - there was no turnaround for that beaten-up biotech, which again lost more than 20%.

Before I present a table updating all of the companies, here are the project's panelists and their selections, with the answer to Question 1 listed first:

  • Adam Aloisi: Honeywell (NYSE:HON), Berkshire Hathaway.
  • Buyandhold 2012: Johnson & Johnson (NYSE:JNJ), Gilead.
  • Chowder: Realty Income (NYSE:O), Gilead.
  • David Crosetti: Reynolds American (NYSE:RAI), Cognizant Technology (NASDAQ:CTSH).
  • Eddie Herring: Coca-Cola (NYSE:KO), Apple.
  • kolpin: Johnson & Johnson (both questions).
  • Eric Landis: Coca-Cola, Chevron (NYSE:CVX).
  • Paul Liebowitz: Coca-Cola, Johnson & Johnson.
  • Tim McAleenan: Nestle, Berkshire Hathaway.
  • Regarded Solutions: Johnson & Johnson, Exxon Mobil (NYSE:XOM).
  • richjoy: Gilead, Medtronic (NYSE:MDT).
  • ScottU: Realty Income, Visa (NYSE:V).
  • Brad Thomas: Realty Income, STAG Industrial (NYSE:STAG).
  • Nicholas Ward: Disney (both questions).
  • Bob Wells: Kinder Morgan, Ventas (NYSE:VTR).

In Part 3 of the series, I revealed my selections: Johnson & Johnson and Altria (NYSE:MO).

After presenting the data tables, I will make a few observations. But I'd be remiss if I didn't state an important caveat: This was never set up as a "contest." When asked to make their selections, the panelists were not told results would be revisited annually. So I thank them for putting themselves out there, and for being good sports about these reviews.

In the tables below, positions are displayed in order of how much each would have gained through May 19, 2017, had $1,000 been invested at the closing price on May 22, 2015. Those statistics were obtained using the calculator by Dividend Channel, and include reinvested dividends. Also included is data for several popular benchmarks: SPDR S&P 500 ETF (NYSEARCA:SPY), Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), and Vanguard Dividend Growth Fund (MUTF:VDIGX).

Question 1: If you could only own one company in your portfolio, which would it be?

COMPANY

PANELIST

$1K = 5/20/16

1ST YR GAIN

$1K = 5/19/17

2ND YR GAIN

TWO-YR GAIN

RAI

David

$1,368

36.8%

$1,892

38.5%

89.2%

MO

Mike

$1,279

28.0%

$1,492

16.7%

49.2%

JNJ

Buyandhold, kolpin, Regarded

$1,144

14.5%

$1,317

15.9%

31.7%

HON

Adam

$1,092

9.3%

$1,295

18.6%

29.5%

O

Brad, Chowder, Scott

$1,319

32.0%

$1,257

(-4.2%)

25.7%

NSRGY

Tim

$972

(-2.8%)

$1,152

19.3%

15.9%

KO

Eddie, Eric, Paul

$1,102

10.2%

$1,137

3.3%

13.7%

DIS

Nicholas

$916

(-8.4%)

$1,002

9.4%

0.2%

GILD

richjoy

$752

(-24.8%)

$600

(-20.3%)

(-40.0%)

KMI

Bob

$436

(-56.5%)

$491

12.6%

(-51.9%)

TOTAL

$10,380

3.8%

$11,635

12.1%

16.4%

SPY

$985

(-1.47%)

$1,159

18.4%

15.9%

VIG

$1,007

0.7%

$1,167

15.1%

16.7%

SCHD

$1,022

2.2%

$1,189

15.6%

18.9%

VDIGX

$1,026

2.6%

$1,110

10.8%

11.0%

Question 2: If you had $25,000 to invest TODAY on one company and you planned to hold it for 10 years or more, which company would you buy?

COMPANY

PANELIST

$1K = 5/20/16

1ST YR GAIN

$1K = 5/19/17

2ND YR GAIN

TWO-YR GAIN

STAG

Brad

$1,014

1.4%

$1,379

36.0%

37.9%

V

Scott

$1,124

12.4%

$1,348

20.0%

34.8%

JNJ

kolpin, Mike, Paul

$1,144

14.4%

$1,317

15.9%

31.7%

VTR**

Bob

$1,157

15.7%

$1,246

7.7%

24.6%

AAPL

Eddie

$733

(-26.7%)

$1,201

63.8%

20.1%

BRK.B

Adam, Tim

$981

(-1.9%)

$1,129

15.1%

12.9%

CVX

Eric

$998

(-0.2%)

$1,108

11.1%

10.8%

MDT

richjoy

$1,051

5.1%

$1,104

5.1%

10.4%

XOM

Regarded

$1,075

7.5%

$1,017

(-5.4%)

1.7%

CTSH

David

$971

(-2.9%)

$1,012

4.2%

1.2%

DIS

Nicholas

$916

(-8.4%)

$1,002

9.4%

0.2%

GILD

Buyandhold, Chowder

$752

(-24.8%)

$600

(-20.3%)

(-40.0%)

TOTAL

$11,916

(-0.7%)

$13,463

13.0%

12.2%

SPY

$985

(-1.47%)

$1,159

18.4%

15.9%

VIG

$1,007

0.7%

$1,167

15.1%

16.7%

SCHD

$1,022

2.2%

$1,189

15.6%

18.9%

VDIGX

$1,026

2.6%

$1,110

10.8%

11.0%

**VTR results include the value that spinoff Care Capital Properties (NYSE:CCP) contributed.

Observations & Notes

If one combined the lists to form a 19-stock portfolio, a hypothetical $19,000 investment on May 22, 2015, would have been worth $22,179 on May 19, 2017 - a 16.7% gain over two years. That beat SPY, trounced VDIGX, and matched VIG. But it was topped by the 18.9% of SCHD, an ETF favored by Seeking Alpha's "Godfather of DGI," David Van Knapp.

Reynolds American was consistently smokin', with advances approaching 40% each year and a total gain of 89.2%. RAI, Dave Crosetti's answer to Question 1, saw its share price take off after the announcement that it was being acquired by British American Tobacco (NYSEMKT:BTI). Interestingly, Dave said back in 2015 that he had chosen RAI, in part, because of its pending merger with Lorillard - a deal finalized later that year.

RAI Chart

Few Dividend Growth Investing practitioners will be surprised that a consistently fine showing also was turned in by Johnson & Johnson, which gained 14.5% in Year 1 and 15.9% in Year 2, effectively doubling the 2-year performance of the S&P 500 Index.

Frequent commenter kolpin liked JNJ so much she chose it as her answer for BOTH questions, saying, "Not many other companies offer the same potential for long-term growth as well as dependable, rising income." This graphic, from Johnson & Johnson's website, shows just how dependably that income has risen:

Seeking Alpha's resident REIT guru, Brad Thomas, hit one out of the park with STAG - although investors had to be patient. The company gained only 1.4% in Year 1, but then zoomed up 36% in Year 2. Given that Brad chose it as his answer to the 10-year question, those who invest in it should have had a longer-term view, anyway. In an article earlier this month, Brad said that despite this run-up, he still considers STAG to be a "buy."

Another REIT, Realty Income, went in the opposite direction. After soaring to a 32% gain in Year 1, it landed with a thud in Year 2, falling 4.2%. Although a combination of Fed interest-rate hikes and overvaluation seemed to work against O, its 2-year gain of nearly 26% is nothing to sneeze at - especially since investors are confident that "The Monthly Dividend Company" will keep the income flowing month after month after month.

Even with O's pullback, Scott's selections of Realty Income and Visa combined for a 30% gain over two years on a $2,000 investment. And it should be noted that in his one-year look back at his choices on May 25, 2016, Scott said he would no longer be buying O but would still be adding V. Pretty impressive call.

Berkshire Hathaway was the only non-dividend-paying stock chosen, with Adam and Tim selecting it as the answer to the more long-term question. Although it performed well in Year 2 (after a loss in Year 1), Warren Buffett's company gained 3.3% less than SPY did, and Adam and Tim scored better with their answer to Question 1.

As mentioned earlier, Tim's Nestle had a nice comeback year. Meanwhile, Adam's Honeywell just kept right on keepin' on, following a 9.3% gain with an 18.6% advance - making me kick myself even harder for not buying it after having stated that Adam's description made me want to own it.

Kinder Morgan, the company so many investors now love to hate, had Bob feeling blue at this time a year ago. Still, it at least gave investors a little hope in Year 2. Plus, Bob had a very astute choice of health REIT Ventas, up nearly 25% over two years.

Speaking of hope - is there any for Gilead? It seems that every time I look, it is in the red again - day after day, month after month, year after bloody year. The overall market was down in Year 1 and up in Year 2, but GILD was consistent. Consistently bad! Some folks are STILL saying, "Its P/E ratio is under 7! Buy it!" Sorry, but GILD moved from "value" to "value trap" a couple dozen percentage points of loss ago.

GILD Total Return Price Chart

Conclusion

The panelists were not required to choose dividend-growing stocks for this project, but most did. Well, DGI is a long-term strategy. It takes years of patiently putting money to work for it to do its thing.

So my major take-away from this collaborative effort is that one or two years is not nearly long enough to reach any real conclusion.

Heck, Question 2 specifically asked the panelists to consider a 10-year holding period.

So we'll continue to check back annually, through market ups and downs. It will be interesting to see what becomes of Reynolds American, how Apple navigates a tricky market for consumer electronics, if Visa and Honeywell keep moving higher, and whether Gilead ever makes the acquisitions necessary to return to earnings growth.

Or maybe, most of us simply will be shaking our heads and saying, "Why didn't we just buy more JNJ?"

Disclosure: I am/we are long AAPL, CVX, GILD, JNJ, KMI, KO, MO, O, VTR, XOM, VIG, VDIGX.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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