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5 buy-and-hold stocks to sell -- and 5 to snag
Turbulent times offer great opportunities to sell what needs to be sold during a rally and to buy what needs to be bought during a correction.
By Jim Jubak
Stocks dont have memories. But investors do.
Thats why technical analysis works: Its buy/sell indicators and support/resistance levels rely on investors' tendency to sell when stocks approach past highs and buy when stocks approach past lows.
Thats why the technology rally of 2003 was so explosive. Investors who remembered the days when Lucent Technologies (LU, news, msgs) traded at $75 or Ask Jeeves (ASKJ, news, msgs) at $125 kept buying because, even after a climb of 100%, the stocks looked cheap at $3 and $13 a share, respectively.
And its why so many long-term investors hang onto the great names of yesteryear for year after year of lackluster returns. How else do you explain the continued grip of the once-dominant AT&T (T, news, msgs) on so many portfolios: AT&T Wireless (AWE, news, msgs), Agere Systems (AGR.A, news, msgs), Lucent, SBC Communications (SBC, news, msgs) and Verizon (VZ, news, msgs) -- all former members of the AT&T phone empire -- are among the top 20 stocks held by investors at Merrill Lynch.
This tendency to keep worshipping at the shrine of former corporate greatness, even when the flame has gone stone cold, is always damaging to long-term returns. Its most damaging when the world is at its most turbulent.
In short, like right now.
The checklist
You want a checklist of change? How about this?- The rise of billion-consumer economies in India and China.
- The aging and slowing of economies in Japan and Europe.
- Commodity price inflation and manufactured-goods deflation.
- The rise of wireless technologies that obsolete vast chunks of global infrastructure.
- The simultaneous increasing dependence on the dollar as the global currency and the decline in the quality of that currency.
- The rise of the United States as the global farming power.
- Technologies that put flat screens and Internet nodes everywhere.
You get the picture. But have you gone through the blue-chip core of your portfolio with these changes in mind?
Ive been going through the two long-term portfolios that I keep as part of Jubaks Journal with these thoughts in mind. In contrast to Jubaks Picks, a 12-to-18 month portfolio with frequent trades, the 50 Best Stocks in the World portfolio and the Future Fantastic 50 portfolios are designed for long-term buy-and-hold strategies. And I really do mean buy and hold: By the rules of these portfolios, I can make changes only once a year, on their respective September and July anniversary dates. Even then, I try to keep the annual turnover in the lists to less than 10%.
Im not about to change those rules now. I have been thinking, though, about my annual changes in light of all the columns Ive written in the last six months about today's massive global economic changes. Which five stocks that everybody loves should be examined to see if they're living on fond memories? Which five stocks not on my Future 50 list of global up-and-comers might deserve a place on either list?
All this is preliminary. I dont expect anyone to trade on the basis of these initial thoughts. (In fact, I deeply hope that no one will.)
Instead, consider this a road map of potential trouble and opportunity for the long-term investor. I assume that Ill hear plenty of comments via e-mail from you about this list. The more the merrier. By all means, suggest names on either side of the ledger that you think Ive left out.
5 gorillas that may be losing their grip
Fannie Mae (FNM, news, msgs). The company buys home mortgages from primary lenders, using capital it raises cheaply thanks to an implicit repayment guarantee from the U.S. government. It repackages the loans and resells them in the secondary market. I dont think the current intense criticism of the agency will change this unique relationship. From current hearings and investigations, however, it is clear Fannie Mae operates with dangerously lax regulatory oversight and shaky internal controls. That poses a major problem for a company that uses hard-to-predict derivatives so extensively that no outside investor can possibly calculate the risk in its portfolio. And, so, I wonder if investors should just take managements word that everything is OK.
Home Depot (HD, news, msgs). Yes, yes, I know the company has revived growth and that its stock has rallied strongly. The category-killer, big-box store, however, no longer seems such a compelling investment idea. Wal-Mart (WMT, news, msgs) continues to put distance between itself and other big-box retailers by demonstrating that it is infrastructure and culture that count. Wal-Mart has built a system of distribution from computerized inventory tracking to sourcing and a culture of relentless cost-cutting that is, to date, unique in retailing. Without that infrastructure and culture, other retailers are stocks to own as company futures ebb and flow. They are not, however, must-have long-term investments.
Merrill Lynch (MER, news, msgs). Once upon a time, Merrill Lynch was aggressively determined to bring U.S.-style financial products to Europe, Japan and beyond. Then the bubble burst, and, in the all the cuts, refocusing and restructurings that followed, Merrill Lynch pulled back from its global strategy.
The company has certainly returned to profitability thanks to rigorous cost cutting. Its U.S. brokerage network is perhaps even more dominant now than before the bubble since many of its largest full-service competitors cut back even more. But an investor looking for Merrill to lead the drive to bring U.S.-style financial products to the rest of the world has to be disappointed in how this story has played out. Merrills strategy is especially disappointing compared with that of Citigroup (C, news, msgs), which has continued its steady drive into new global consumer financial markets.
Nucor (NUE, news, msgs). I admire Nucor as a steel company and as a pioneer in new technologies that allowed it to make money while most U.S. competitors were losing their shirts. But I fear that global economic winds are blowing against all steel producers.
The world is awash in steel capacity, much of it far less efficient than Nucors. Much of that capacity, moreover, is subsidized in one way or another by governments that dont think twice about floating another loan to a money-losing company. What the world is not awash in is iron ore, scrap iron, coke, graphite and the other raw materials necessary for making steel. Steel demand is rising, but the place for an investor is with the industrial commodity producers.
Walgreen (WAG, news, msgs). Walgreen is the class of the drugstore sector, but is that enough anymore? For years, demographics played to the sectors strength: As the population aged, more people went to drugstores to fill prescriptions and buy over-the-counter medicines. That increased foot traffic and added to growing sales of the non-drug items that, with their higher margins, pump up drugstore profits. But the squeeze on health-care costs -- especially drug costs -- is now a strong trend working against demographics. Increasingly, corporate insurance plans are forcing workers into mail-order drug programs. Over the long term, this new trend will cut the foot traffic so critical to drugstore profits.
5 gorillas still hidden in the mist
Accor (ACRFF, news, msgs). Most investors dont have Europes largest hotel group on their radar screens. They should -- because of the companys drive into Asian markets. Accor doesnt operate any of its 4,000 properties under its name, but its brands cover the hotel market from luxury (Sofitel) to budget (Motel 6). The companys strength -- and what excites me about Accors expansion in Asia -- is in the middle and budget sectors.
With incomes rising in Asia, the region is experiencing a middle-class travel boom. And all those travelers need a place to stay. In China, where Accor had concentrated on opening five-star luxury Sofitels, the company has just opened its first budget-priced Ibis property outside of Beijing. Two more Ibis hotels will open before the end of 2005. The price to stay at the new Ibis: An introductory rate of $22 a night on weekdays.
Carbo Ceramics (CRR, news, msgs). Evidence is increasing that companies need to invest in technologies to produce oil and gas from fields that are old, crippled by bad management or in new, more difficult production environments. Carbo Ceramics makes ceramic beads, called proppant, that are injected into oil- and gas-bearing rocks to produce fractures so producers can extract more oil and gas.
Ceramic proppant is more expensive than most alternatives, but the increased production returns increasingly justify the cost. Carbo Ceramics has a 56% global market share, and ceramic proppant is picking up market share against other technologies.
Companhia Vale do Rio Doce (RIO, news, msgs). Lets see, global demand for iron ore transported across oceans is growing at about 6% a year. Companhia Vale do Rio Doce, already the worlds largest iron-ore producer, increased production by 8% in 2003, and it plans to boost iron-ore mining capacity by 73 million tons by 2009. The companys sales should climb 22% in 2004, according to Santander Central Hispano Investment. This growth comes despite the companys minuscule market share in the United States (thanks to the weak dollar) and the relatively minor contribution from the companys production of copper and alumina. Imagine what a growth beast this company could be when those businesses contribute. Management believes that copper and alumina production will contribute about 45% of revenues in 2010, up from 25% now.
Smithfield Foods (SFD, news, msgs). Short-term events, such as avian flu and mad cow disease, have thrown the global protein markets into chaos. But in the long run, increasing incomes in the developing world mean rising demand for protein from chicken, beef, pork and soybeans, which will have to be met in part by U.S. suppliers.
Smithfield is one of the best integrated protein producers around, and its management understands how to acquire market share without overpaying or stretching too far. In the U.S., Smithfield is one of the leading practitioners of value-added packaging and processing for consumers willing to pay a little more for convenience.
Washington Post (WPO, news, msgs). The good ol establishment Washington Post as an up-and-comer? Yes, thanks to the companys Kaplan education division. Management is betting that this collection of testing services and for-profit educational institutions will be the companys growth engine over the next decade. Global economic competition is creating new demand for career education and re-training. So, the company is on the right side of a huge trend. While not a pure-play on this trend, the Post brings access to capital and solid management that are likely to smooth the ride for investors.
This year is likely to bring enough market volatility so that short- to mid-term investors will have the chance to trade in and out of many of these names several times. (I have bought and then sold Carbo Ceramics and Smithfield Foods in Jubaks Picks in recent months.) Long-term investors will have an even better opportunity -- a chance to sell what needs to be sold during a rally and to buy what needs to be bought during a correction.
All you have to know is which stocks belong in which groups. Let me know what you think of my choices.
New developments on past columns
The 50 Best Stocks in the World
Time to revisit my buys on this portfolio. I give buy ratings to the stocks on this list -- up to 10 at any one time -- that I think represent a particularly good bargain at current prices. All other stocks are holds for long-term investors. When a stock becomes a sell, I drop it from the list in my annual September overhaul of this portfolio. As of March 19, I rate eight stocks buys for long-term investors:
- BP (BP, news, msgs)
- Charles Schwab (SCH, news, msgs)
- Citigroup (C, news, msgs)
- Exxon Mobil (XOM, news, msgs)
- First Data (FDC, news, msgs)
- Johnson & Johnson (JNJ, news, msgs)
- Microsoft (MSFT, news, msgs)
- Pfizer (PFE, news, msgs).
Ive dropped the buys on four more because of price appreciation since initiating those ratings:
Since the last additions/subtractions from the list on Sept. 15, 2003, the 50 Best Stocks in the World portfolio was up 12.15% on March 17, compared with a 10.74% gain on the S&P 500 and a 7.10% rise in the Nasdaq Composite.
Future Fantastic 50
The recent stock market retreat gives me an opportunity to make a few buy recommendations in this portfolio. Remember what a buy means: The recent price of this stock makes it a good bargain for a long-term investor. As of March 19, I rate these stocks buys:
Since the last additions/subtractions from the list on July 28, the Fantastic 50 portfolio was up 20.08% on March 17, compared with a 12.77% gain on the S&P 500 and a 13.91% rise in the Nasdaq.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: BP, Microsoft, Pepsico, Pfizer, Schlumberger and The Washington Post Company. He does not own short positions in any stock mentioned in this column.
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