Jubak's Journal
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7 more stocks destined for blue-chip status
My Future Fantastic 50 portfolio holds what I think could be tomorrow's giants. My new selections catch two key trends: rising demand for energy and for security.
By Jim Jubak
We know the future will be different from the past. But we tend to think it will be like the present. When we try to imagine the future, all too often, we merely project the trends of the moment over the next 10 or 20 years.
And thats exactly the trap that the Future Fantastic 50 portfolio, my attempt to put together a list of stocks that will turn into tomorrows blue chips in the next five years, fell into as it roared out of the gate in July 1999 and then flopped on its face from 2000 through 2002.
My crystal ball has worked better in the last two years. And in the year that ended on July 20, the Future 50 portfolio outperformed the Standard & Poors 500 Index ($INX) and the Nasdaq Composite ($COMPX).
My goal this year is to apply the lessons I learned from the disaster of 2000-2002 and increase the margin by which this aggressive portfolio beats the indexes.
So heres my annual revision to the Future 50. This years report includes:- Four stocks that are ready to graduate from this list to the more mature 50 Best Stocks in the World portfolio. (Theyll join that list when I do that annual revision in September.)
- Three stocks that drop off the Future 50 list because they no longer have what it takes to become one of tomorrows blue chips.
- And seven new picks that have a chance to be blue chips of the future.
A shakeout
In July 1999, when I asked Jubak's Journal readers to nominate stocks for this list, I suggested that they keep this in mind: If you were to look at the list in July 2004, youd say about each entry, Boy, I wish Id bought that five years ago, and Id sure be wiling to hold it for another five years. The resulting list was heavy on the rising stars of the telecommunications, semiconductor and Internet sectors. And those picks would have worked out just fine if the trends of that moment had dominated the next five years.
But those trends broke in 2000, revealing that some of these stocks were the real thing and others the products of wishful thinking. The portfolios crystal ball had a very big crack in it that proved very expensive. From its inception in July 1999 through July 2002, it lost 52%. That was about even with the performance of the Nasdaq Composite, down 51% for the period, and worse than the performance of the S&P 500 Index, down 32%.
The Future 50 bounced back from July 2002 through July 2003, gaining 22%. But while that was better than the 7% gain on the S&P 500, the bounce still wasnt as big as the Nasdaq's 27% gain. The crystal ball was still broken, as far as I was concerned: I expect an aggressive portfolio like the Future 50, designed to be used as an edge around a more conservative core composed of stocks like those in the 50 Best in the World portfolio, to be volatile. But I dont think it should fall more than the index in a bear market and then trail in a bull market.
From July 2003 through July 2004, the portfolio did better on that score. The Future 50 gained 12.9% during that period, beating both the 10.2% gain for the Nasdaq and the 11.1% gain for the S&P 500. That 2.9 percentage point difference between the Future 50 and the Nasdaq amounts to a 26% better performance for the Future 50.
Still, you dont dig out of a deep hole overnight. This years gain still leaves the Future 50 down a cumulative 34% since its inception. During that same period, the Nasdaq was down 27% and the S&P 500 down 16%.
Looking to energy and security
I think its possible to fill in more of that hole and to improve on that 2003-2004 performance in the next 12 months.
How? By concentrating on two trends, energy and security, that have the legs to carry them from the present more than five years into the future. Fast-growing demand for energy from the economies of China and India, plus the difficulty that oil producers are having in increasing capacity, will keep energy prices on an uptrend for at least the next five years. Oh, there will be slumps and peaks, but the trend is a good bet for the Future 50 portfolio.
So this year Im adding four energy stocks to this list of future blue chips: fuel cell producer FuelCell Energy (FCEL, news, msgs), ceramic proppant maker CARBO Ceramics (CRR, news, msgs), sour-crude refining specialist Valero Energy (VLO, news, msgs) and aircraft and maritime fuel logistics manager World Fuel Services (INT, news, msgs).
And Im adding three security stocks to the Future 50: provider of identity verification services ChoicePoint (CPS, news, msgs), network access and identification security software company Netegrity (NETE, news, msgs) and high-tech defense company L-3 Communications (LLL, news, msgs).
The dearly departed
Four companies have graduated from the Future 50 this year to the 50 Best Stocks in the World portfolio, opening up slots for four of the seven new future blue chips. The graduates are biotechs Amgen (AMGN, news, msgs) and Genentech (DNA, news, msgs), communications chip leader Broadcom (BRCM, news, msgs) and the Big Hog of the pork market Smithfield Foods (SFD, news, msgs).
Three stocks also drop off the Future 50 this year. I didn't drop stocks from the list because they produced big losses in the last year or even the last few years. Otherwise, stocks like JDS Uniphase (JDSU, news, msgs) and Taiwan Semiconductor (TSM, news, msgs) would be long gone. But that would take stocks that dominate their sectors off the list just because those sectors are in the markets doghouse at the moment. Patience and then more patience is sometimes the best approach to these future blue chips.
But not always. When a company loses the competitive edge that put it on the list in the first place, it should get the boot. So this year Im dropping Atlantic Coast Airlines Holdings (ACAI, news, msgs) because the company is making the transition from a regional to a low-cost carrier. That change pretty much eliminates the competitive advantages that put Atlantic Coast Airlines on the Future 50 to begin with.
I'm also dropping Ciena (CIEN, news, msgs) because the optical market has moved away from Cienas strengths, and the company has been slow to respond to the move with new dominant products. It has lost ground to competitors such as Lucent Technologies (LU, news, msgs) and Nortel (NT, news, msgs).
Finally, Im dropping RealNetworks (RNWK, news, msgs) because the company is increasingly being forced to compete in its core market on content, and thats an extremely tough and competitive battleground that doesnt play to RealNetworks strengths.
On the 'buy' list
With these seven changes -- a portfolio turnover rate of 14% this year -- Ive set the Future 50 list for another year. By the rules of this portfolio, these names wont change, barring bankruptcy or some equally disastrous event, until the revision of July 2005.
What will change from quarter to quarter (and perhaps even month to month if market conditions justify it) are the "buy" ratings that I put on the individual stocks of the Future 50 (and the 50 Best, too, as youll note in the updates to this column) when I think the share price makes a stock particularly attractive for long-term investors looking to build positions at reasonable prices. (The removal of a buy doesn't signal a sell, but rather, my opinion that the stock has appreciated to something like fair value, and the price doesnt justify buying more shares at the moment. Wait for a better opportunity.)
My six current "buy" recommendations for the Future 50 are Affymetrix (AFFX, news, msgs), Analog Devices (ADI, news, msgs), ChoicePoint, FuelCell Energy, Performance Food Group (PFGC, news, msgs) and Taiwan Semiconductor.
Expect my annual update of the 50 Best Stocks in the World portfolio in mid-September.
New developments on past columns
50 Best Stocks in the World
Im putting "buy" recommendations on eight stocks listed in the 50 Best Stocks in the World portfolio, as well. Current buys are Charles Schwab (SCH, news, msgs), Cisco Systems (CSCO, news, msgs), First Data (FDC, news, msgs), Intel (INTC, news, msgs), Microsoft (MSFT, news, msgs), PepsiCo (PEP, news, msgs), Southwest Airlines (LUV, news, msgs) and Texas Instruments (TXN, news, msgs). I'm dropping the former "buys" on BP (BP, news, msgs) and Exxon Mobil (XOM, news, msgs) because the shares have appreciated so much that theyre no longer at an attractive price for building positions.
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 did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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