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A dozen stocks for the next 5 years
We dont buy the post-bubble notion that long-term investing is dead. There's always a place for a good company riding a solid trend.
By Michael Brush
Conventional wisdom today isn't very friendly to the tried-and-true investing style of buy-and-hold.
A herd of experts declaring the demise of buy-and-hold is led by Peter Bernstein, respected author of the 1996 bestseller Against the Gods: the Remarkable Story of Risk. He reasons that, after a dramatic run-up for two decades, the markets will spend the next several years bouncing around in a sideways pattern, rather than the comforting steady climb that investors like to imagine.
Exactly why so much of the Wall Street establishment is ready to discredit its age-old, buy-and-hold maxim is unclear. Is it because Wall Street brokerages have a vested interest in encouraging investors to churn their holdings more often? Are fund managers looking to excuse their excessive and costly trading habits?
We dont know. But our response to the notion that buy-and-hold is dead is simple: Baloney. In any market, there are companies that will outperform in the long haul because they have good management, decent financial strength, and a business thats riding some long-term economic or social trend.
To prove Bernstein and his followers wrong, we set out to create a diversified portfolio of 12 stocks that could be held for five years at a nice profit. We began by identifying five trends that would survive for at least that long. Then we looked for good companies that profit from those trends.
For help we turned to natural allies in this kind of quest, value managers with outstanding long-term records, especially ones who quip that their favorite holding period is forever. John Buckingham of Al Frank Asset Management, is a good example. He publishes The Prudent Speculator newsletter, which has achieved annualized returns of 20% since 1977 by holding stocks for 6.25 years on average. Perfect.
We also asked Mark Hulbert of Hulbert Financial Digest, which ranks investing newsletters, to scan his database for letter writers with decent long-term records and relatively low turnover. Then we picked their brains for their best buy-and-hold stocks that fit into our long-term trends. Here are the results.
China growth
The loss of manufacturing jobs to China has disheartened many in the United States. But the trend underscores a cold and profound reality: Chinas growth is so powerful that it likely will become the next superpower, surpassing the United States in economic might sometime this century.
Thats the view of James Rogers, who ran Quantum Fund years ago and made so much money he could retire at the age of 37. Since then, he has circled the globe twice on multiyear extravaganzas designed in part to hone his knowledge of worldly investing. (His most recent trip is chronicled in Adventure Capitalist, an articulate and educational book for investors and non-investors alike.)
The best way to play the China-growth mega-trend? One word: commodities.
Anyone who thinks he is going to get rich in China is fooling himself unless he has something the Chinese want to buy, like copper, iron ore, or steel, Rogers says.
To make things simple, Rogers favors a broad-based commodity play. His Rogers Raw Materials Index -- which he created to offer just that -- is up 100% since August 1998. And it is only getting started, he says. Thats because of the demand from China, but also because development of new sources of commodities has been sluggish for so long -- and demand is now going up at last. Nobody has opened a lead mine in long time, says Rogers. Sugar plantations have been ripped up to become gulf courses for stock brokers. (To look at the returns for the index, click on the link at left under Related sites.)
Rogers fund is only for accredited (read: rich) investors. If thats not you, you can buy commodities futures contracts with help from a broker and roll them over. But this can be cumbersome because commodity indices are thinly traded, and rolling over contracts on individual commodities can run up the tax bill. There are no commodity mutual funds or exchange traded funds yet. (Rogers says once they start popping up, that may be a sign the commodity play is over.) For the individual investor, one approach is to buy shares of companies producing raw materials China does not have, but sorely needs.
One prime example: iron ore. Thats why Tim Ghriskey, of Ghriskey Capital in Greenwich Conn., owns shares of Companhia Vale Do Rio Doce (RIO, news, msgs), the worlds largest iron-ore producer. Based in Brazil, the company pays a 4.8% dividend, and analysts expect pretax earnings to grow by at least 8% a year between now and 2010. Iron-ore production will increase by 25% over the next three years, say analysts at Morgan Stanley, but they believe demand will grow even faster.
To be sure, there are political, economic and management risks to holding companies, risks you dont get by holding commodities themselves, says Rogers.
Aging: a powerful demographic force
As an investment theme, the aging population may feel as tired as baby boomers who are hitting their golden years. But the truth is, this is a powerful demographic force that aint going away. Theres a multitude of ways to play this theme, typically in health care. Here are some of the more solid plays.
Ghriskey likes Teva Pharmaceutical (TEVA, news, msgs), the largest producer of generic drugs in the world. Daniel Seiver, an economics professor at Miami University, Ohio, and author of the PAD System Report (PAD stands for patience and discipline), strongly recommends Cardinal Health (CAH, news, msgs) and ArthroCare (ARTC, news, msgs). Notably, Seiver's PAD System Report produced 8.1% annual returns during the past 10 years, according to Hulbert Financial Digest. And the PAD's average holding period was more than four years.
As a distributor of drugs and medical devices and a provider of hospital billing and recordkeeping systems, Cardinal Health is not dependant on approval of blockbuster drugs. Instead, it will simply grow as the demand for health care increases with the aging of the population. As for ArthroCare, it provides gear used in minimally invasive arthroscopic surgery. These procedures do less damage than traditional surgery to surrounding tissue, so recovery time is faster. Business will improve as this type of surgery is used in more kinds of procedures, says Seiver.
John Dessauer, of John Dessauers Investor's World, likes Novartis (NVS, news, msgs), a pharmaceutical company based in Switzerland with excellent financial strength. Its using its healthy cash flow to build a huge research center in Cambridge, Mass., as part of an effort to become a leading producer of anti-cancer drugs. Dessauers annualized return over the past 10 years was 6.4%. His average turnover is about 1.3 years.
The urge to protect what you have
A popular mantra after Sept. 11 was: One thing is sure, it is going to happen again. Well, it hasnt. And we hope it never does. But it probably will. And that will remind everyone they need to be better prepared for when terror strikes. Prevention, of course, is paramount.
As a play on this theme, Seiver likes SunGard Data Systems (SDS, news, msgs), which supplies backup systems that recover data after emergencies. Youd think more companies would have put these in place by now. But studies have shown that while companies have talked a lot about what they should do, not that many have done it, says Seiver. Even without terrorism, it is a play on hackers and massive electricity grid failures.
Buckingham, of Al Frank Asset Management, likes InVision Technologies (INVN, news, msgs), which provides explosive and weapons detection systems used in airports and other public spaces.
The battle against obesity
Overweight people across the United States sat up and took notice last week when British scientists announced they found a hormone that could be injected into the body to suppress appetite. Unfortunately, magical weight-loss cures like these are still three to five years off, and the medical solutions out there, like surgery, are risky and dont always work.
So for several years at least, well still have to lose weight the old fashioned way -- watching our diets and working out. Thats where Nautilus Group (NLS, news, msgs) comes in. It sells fitness equipment under brand names like Nautilus, Bowflex, Schwinn, StairMaster and Trimline. The stock got crushed when growth hit the skids in 2002 and momentum investors bailed. Buckingham, who owns the stock personally, thinks new management and new products -- plus the persistent desire to shed pounds -- will help turn the stock around. Meanwhile, at current prices, it pays about a 4% dividend.
| 12 stocks for the next five years | | Company | Industry | Monday close | YTD chg. | | Companhia Vale Do Rio Doce (RIO, news, msgs) | Iron mining | $39.82 | 37.7% | | Teva Pharmaceutical (TEVA, news, msgs) | Generic pharmaceuticals | $60.08 | 55.6% | | Cardinal Health (CAH, news, msgs) | Wholesale drugs | $57.04 | -3.6% | | ArthroCare (ARTC, news, msgs) | Medical appliances | $19.44 | 97.4% | | Novartis AG (NVS, news, msgs) | Pharmaceuticals | $39.52 | 7.6% | | SunGard Data Systems (SDS, news, msgs) | Business software | $28.69 | 21.8% | | InVision Technologies (INVN, news, msgs) | Security systems | $27.09 | 2.8% | | Nautilus Group (NLS, news, msgs) | Athletic equipment | $12.25 | -8.3% | | Devon Energy (DVN, news, msgs) | Independent oil and gas | $53.00 | 15.5% | | EnCana (ECA, news, msgs) | Independent oil and gas | $37.00 | 19.0% | | Patterson Energy (PTEN, news, msgs) | Oil & gas drilling and exploration | $28.00 | -7.2% | | Cheniere Energy (LNG, news, msgs) | Oil & gas equipment & exploration | $5.90 | 360.9% |
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Natural gas shortage
Its not the sexiest theme in the economy. But in North America, theres a shortage of natural gas used in everything from kitchen stoves to kilns producing cement. The problem isnt so much that the gas is gone. Its really that the easy pickings are gone. So it costs more now to tap gas deposits to meet supply. Yet we cant yet import enough of the stuff from parts of the world where it is more abundant, Charlie Maxwell, an energy analyst with Weeden & Co. The depletion of the existing fields is running amok, he says.
With the economy showing signs of recovery, this is going to move us into a fairly tight supply-demand equation for a while, says Tom Petrie of Petrie Parkman & Co., a Denver-based investment banking firm that concentrates on the energy industry. Bigger supplies from new Canadian pipelines or liquefied natural gas (LNG) from abroad wont come on line in a big way until the end of the decade, Petrie says.
So, as a play on the natural-gas shortage in the meantime, Petrie touts Devon Energy (DVN, news, msgs) because a series of acquisitions have given it a good reserve base. Maxwell of Weeden likes EnCana (ECA, news, msgs), the largest producer of natural gas in Canada. EnCana has decent reserves and growth, but thats not its biggest asset. Above all, its got a huge Canadian land position, which gives you a shot at future reserves, says Maxwell.
Rikard Ekstrand, a portfolio manager with First Pacific Advisors, whose average holding period is five years, has recently been adding to his position of Patterson Energy (PTEN, news, msgs). He likes the company because it controls so many of the land rigs used in producing natural gas in North America. Patterson, expected to earn 60 cents a share this year, could see earnings go up sixfold over the next couple of years as the demand for rigs increases, because of tighter supplies of natural gas, Ekstrand says.
As a play on future LNG imports, investors should consider the little-noticed Cheniere Energy (LNG, news, msgs), a Houston company that's planning to install three LNG-receiving terminals in Texas and Louisiana by 2008. Chenieres not offering estimates. But a little math suggests that the 2 billion cubic feet per day in LNG processing capacity that it will control after it gives away capacity in financing deals could eventually bring in cash flow of $10 per share, before taxes. That would support a stock price seven or eight times recent levels of $5.80 per share. (Full disclosure: I'm so persuaded by the Cheniere Energy story that I own some shares. Petries firm is an adviser on obtaining financing.)
Held but not forgotten
So there they are: an even dozen stocks to hold for five years. We'll check back in on this list from time to time, and we're confident the report card will be good overall.
That said, you cant buy any of these stocks and go live in a cave for five years. Theyre strong stocks and safe bets. But any alert investor has to keep an eye out for signs of trouble that suggest its time to take profits.
Says Buckingham: It is not a buy-and-forget strategy.
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