The top ten
When analyzing stock portfolios, professionals first sort them by size, as the larger positions will point the way to future returns. The ten largest positions in my client portfolios include Apple (AAPL-$262), XTO Energy (XTO-$48), Intel (INTC-$23), Google (GOOG-$530), IBM (IBM-$130) and Novo-Nordisk (NV)-$80) among growth stocks. Income stocks Annaly Mortgage (NLY-$17), ING Global REIT ($8), Franklin Trust (FT-$6) and Alliance Global Government (AWF-$14) provided excellent stability as the market struggled and continue to add above average dividend yields.
In the coming months, I plan to reduce the income group as the global economic recovery gains momentum. That will eventually lead to higher interest rates with accompanying pressure on the bond market. I expect the XTO positions to convert through merger in the next few weeks into Exxon (XOM-$69), which seems destined to remain within my top ten.
As that may indicate, I try to follow Mr.Buffett’s advice in this and other areas through having my favorite holding period as “forever.” That does not mean simply buying and holding stocks without paying continuing attention to possible fundamental weaknesses developing in their management or market sectors. It does mean developing the wisdom to distinguish stock price dips stemming from internal weaknesses from the fainting spells coming from overall stock market selling.
One mistake investors make is to obsess on the price paid for a stock (which has no bearing on its future stock action), selling at the first chance to “take a profit,” sometimes saying “You can’t go broke taking a profit.” Well, that might be true but you can certainly end up with insipid investment returns. Our returns would be much less if we had “taken profits” on Apple and its brothers. The trick is to avoid this temptation while conducting an ongoing search to try to find the next Apples.
One could search for businesses started by two guys in a California garage, as were both Apple and Hewlett-Packard, but that’s too restrictive. The stocks in my top ten and the contenders got there by searching for companies able to consistently produce superior earnings growth while staking out business positions that give them a competitive edge in markets or products. Mr. Buffett calls these “moats.” He also comments that the best stock to buy may already be in your portfolios and those others named in our top ten are all buys.
I suggest emphasizing larger companies during the still fragile current period of economic recovery. Dividends help and IBM, commonly not considered an income stock, just raised its dividend again, bringing its yield to 2%. Intel yields 2.6% and also has a history of periodic dividend increases. Both easily beat the ridiculously minute yields from the money market funds to which many investors are still fearfully clinging.
Contenders in our second ten include Aflac (AFL-$53), America Movil (AMX-$50), Amazon.com (AMZN-$142), Cisco Systems (CSC)-$27), DuPont (DD-$40), China Life Insurance (LFC-$68), Life Technologies (LIFE-$51), Merck (MRK-$35), Syngenta (SYT-$49) and Waste Management (WM-$35).
Technological capabilities will be increasingly essential for business success. Other strong buys thus include Johnson Controls (JCI-$33), Oracle (ORCL-$26), 3M (MMM-$88), Teva Pharmaceutical (TEVA-$60) and United Technologies (UTX-$74). Bank stocks are in a catfight and I prefer insurers in the financial sector. Besides Aflac, Prudential (PRU-$62) and MetLife (MET-$44) are attractive.
The stock market appears to be pausing for breath. This presents opportunities for upgrading to better stocks like these.