I recently switched jobs for the first time in five years, and after the dust cleared and I got on my feet at the new job, I decided to take my 401K from my previous employer and roll it over into an IRA. I had been contributing about 20% of my paycheck for the past year or two and with the uptick of the market over the last few years, I had enough to buy some decent positions in several different equities. I decided to divide the amount equally between five different securities in equal value.
While I wanted to use the opportunity to get involved with some of the high-flying names I've been excited about and have been eager to invest in, I also said to myself that this is a rare, perhaps once or twice-in-a-lifetime type of opportunity to start some long-term positions in some nice, safe, blue chip names that I would feel like I am in good hands with for the next 30+ years. I decided to compromise and try to enjoy the best of both worlds, by going with two high-flying, high growth momentum-oriented names, two more conservative, stable dividend payers trading at lower valuations and finally one name that I felt fit well into both descriptions. I normally consider myself more of a value investor, but since this is money that I won't be able to touch for 30+ years anyway, I wanted exposure to companies that could give me access to both U.S. and global growth themes that could last for several decades.
Because I'm an avid amateur investor and love to write about my experiences, and because I'd love to help other people who find themselves in similar positions (not necessarily by picking these same stocks but by at least giving them an idea of my approach and thought process), I wanted to share my selections and the rationale behind them here.
I wanted to start with a consumer staple that would be a simple play on global population growth, and that paid out a good dividend and traded at a reasonable valuation. I strongly considered several other consumer staples players including Procter and Gamble, Unilever, and Colgate-Palmolive, but I ultimately decided on the iconic soft-drink giant. For full disclosure, Diet Pepsi is my favorite drink and it feels good to invest in a company that you are a frequent customer of. I know that health concerns have caused soda to decline somewhat in popularity in recent years, as consumers switch to beverages like seltzers, teas, and different types of flavored waters, but I feel that Pepsi is well-positioned to succeed in this environment because it has its legacy soda business but it is also bolstered by a strong portfolio of other 'newer' beverages such as its new Bubly seltzers (which I have to say anecdotally are fantastic) as well as others like Pure Leaf iced tea, Propel water, and Life Water. In addition, Pepsi owns the popular Sabra hummus brand and Naked Juices which give it further diversification away from soda and more exposure to health-conscious consumers.
Pepsi trades at just below 20x earnings, pays out a very nice 3.7% dividend, and is now trading at around $100 at time of press, down from recent highs in the $120s; I bought the stock in the high $90s and am looking forward to owning a small piece of this company for years to come.
Alibaba Group Holdings Ltd. (BABA)
Perhaps the 'riskiest' and most expensively valued of my investments, I nonetheless couldn't resist the opportunity to get my foot in the door with Alibaba, a company that I've always been intrigued by and impressed by. While BABA's nosebleed P/E ratio of over 50X makes me a bit queasy, since this is a long-term, retirement-geared investment, I feel better knowing that it has plenty of time to grow into that valuation as earnings grow over the years. TAL Education (TAL) and Tencent (OTCPK:TCEHY) have been amongst the best investments I've ever made, so I'm comfortable investing in a Chinese company as a play on the long-term growth of China and its consumers. As Alibaba continues the Amazon-like process of getting a foothold in brick-and-mortar retail, it can become even more integrated with China's consumers and also streamline and maximize returns from these brick and mortar locations. As Bryan Deagon wrote in this week's Investors Business Daily:
"The New Retail phase was coined by company founder Jack Ma more than two years ago. 'The big prize for Alibaba in New Retail is modernizing the other 80% of retail sales not yet online,' Raymond James Analyst Aaron Kessler said… 'This means redefining the entire process of conventional workflow.' That includes new marketing methods, pricing models, inventory management, and sourcing and supply-chain management. 'We think this business will ultimately be as high-margin, or better than the existing marketplace model' Kessler said."
The article then notes that Kessler has raised his price target on Alibaba from $250 to $300, which is 50% above current levels.
Jack Ma is one of my favorite CEO's, and is said to have visited more world leaders than China's actual President last year, so I feel great about BABA's ability to successfully expand into new geographies beyond China.
Lam Research Corporation (LRCX)
Lam Research is the aforementioned stock that I feel gives me a foot in both camps; both the exciting, high-growth, tech-focused world, but also one that trades at a very modest valuation and offers a dividend. Lam trades at a surprisingly low P/E of about 12X, which I feel like is very reasonable for a tech name, and also sports a dividend yield over 2%. While a 2% yield isn't huge, it's certainly not bad, and LRCX also seems like a good candidate to grow the dividend over the years so later on by the time I retire it could be a much bigger payout. The stock was recently trading in the $230s, and while I missed my opportunity to buy it in the $170s a few weeks ago during a period of some volatility, I was happy to buy it for just under $200. I like the semiconductor space, and have invested there in the past where I've had some successes but also several failures, so I like the fact that rather than having to pick one semi name, I can go with Lam Research which supplies many different semiconductor companies and therefore is a play on the space as a whole without having to get into the more harrowing game of picking winners and losers. Semiconductors are in everything from cars to refrigerators now, and will only become more prevalent over the decades to come, which makes me feel good about Lam's long-term outlook and its likelihood of becoming a good dividend growth story.
Dominion Energy Inc. (NYSE:D)
While a utility certainly isn't the most exciting or sexiest investment, I felt like this was the right situation to invest in one to stabilize my portfolio and to go with something a little more defensive, so I used one of my allocations to take a position in Dominion Energy. Trading at 20X earnings, the stock is actually down quite a bit from its 52-week high of $85 and is now trading in the low $63.36 at the time of writing this. I had read an article about the company in Barrons last year and had been interested in investing when I was able to, and had felt like I missed my opportunity as the stock went into the $80s. However, when I began doing research for this portfolio, I was pleasantly surprised (although of course I felt bad for current shareholders) to see that Dominion was back in the $60s, so right back where it was when I first saw it and I jumped at the opportunity to get into it. Dominion boasts a really impressive 5% dividend, and has a strong commitment to growing the dividend payouts going forward. Sometimes a dividend yield being too high i.e. 7% or 10% can be a sign of trouble and should be avoided, but 5% is high enough to give me a nice payout while not being so high that I'm nervous about it. A lot of Dominion's business is centered around Virginia and North Carolina, which I like because these Sunbelt states are experiencing population growth and a boon of economic growth, so it is a good place for a utility to be and it gives Dominion a little more upside than the average utility in my eyes. Furthermore, Dominion isn't 'just' a traditional utility in the textbook sense - Barron's describes how the stock formerly known as Dominion Resources "became Dominion Energy; signaling its shift from a traditional utility dependent on commodities like coal for electricity production to a more diversified company that can tap solar energy and wind power, run electric and natural gas transmission lines, and oversee a growing business storing and transporting liquefied natural gas."
The stock has had some challenges going against it recently, including complications from its acquisition of SCANA, but I figure that is the reason the stock is down about 25% from its highs and that I have plenty of time to wait for those problems to be sorted out since this is in my retirement portfolio.
Intuitive Surgical (ISRG)
Like Alibaba, ISRG is trading at around a 50x P/E ratio, which might normally scare me off, but again, in this case my rationale is that I have years to wait for the stock to grow into this valuation as the company grows. ISRG is an incredible company with some really impressive products that are revolutionizing the future of surgery. What I really like about ISRG is that even though the products are a great story, its cash cow is actually procedure growth, not unit sales growth, which means that it has a nice base of recurring revenue.
Being that ISRG is the first mover in the exciting space of robotic surgery, and doctors and hospitals have raved about the machines thus far, it gives ISRG a nice moat against its competition. Now that many doctors have trained on these machines and many hospitals have invested in them, it's unlikely that they are going to suddenly switch and look for a different solution.
Lastly, sticking with my theme of both U.S. and international growth, ISRG is also expanding into emerging markets and this presents a huge runway of growth going forward.
Lastly, it also feels good to be invested in a company that is literally both improving and prolonging the lives of people around the world by making surgeries safer less invasive and reducing the need for lengthy hospital stays.
Time will tell how this portfolio strategy and these selections play out, but I feel good about my approach and feel like I have good diversification and exposure to the themes I want while still being somewhat conservative and locking in some blue chip companies. I hope that anyone reading this who may be in a similar situation found this article and the thought process behind my choices helpful and gives them more confidence in creating their own retirement portfolio.
Disclosure: I am/we are long PEP.
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.
Additional disclosure: I am long BABA, PEP, LRCX, D, and ISRG.