This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

A Value Investor's Plan for 2006

This column was originally published on RealMoney on Jan. 12 at 9:58 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

It's not too late to reflect on the past year and plan for the one ahead.

I'm going forward in 2006 overweight in consumer staples, energy and basic materials, and underweight in everything else. Consumer staples cover the bear case; energy and materials cover the bull case. Financials, which are dependent on interest rate margins, will have a hard time.

In insurance, I think that large-cap life names such as MetLife (MET - Get Report) and Prudential (PRU - Get Report) will pack a punch. Scale is an advantage in the life insurance business. Allstate (ALL - Get Report) is undervalued, and its pricing model is more powerful than the market thinks.

Assurant (AIZ - Get Report) is one of those companies that everyone will wish they bought at the IPO. It is a very good capital allocator. Beyond that, the property and casualty reinsurers in Bermuda are undervalued, but who can tell how bad the catastrophes will be this year? I am getting more hesitant about the group.

In bonds, I think the yield curve will be flat to inverted for a longer time than most anticipate. In general, short rates will rise, and long rates will stay pretty stable. The federal funds rate should top out at 5%, give or take 25 basis points. Credit spreads will remain tight for most of the year and widen a little toward the end of 2006 on fears of recession and consumer credit problems.

There won't be stagflation in 2006, but growth in real GDP will slow, and inflation should rise a little. Toward the end of the year, news stories about a likely recession will proliferate, partly due to a weakening of the residential real estate market.

My guess is that on the whole, the stock market won't perform too badly, but the indices will only see single-digit gains. It won't make either the bulls or the bears happy.

That's my forecast for 2006, but the future is difficult to predict. My investing is conservative, and I don't take my macroeconomic views to their maximum, because macro views sometimes fail. Good investing takes the likelihood of error into account.

Looking Back at 2005

Humility is a huge plus in managing money, because it keeps us from becoming wedded to ideas that have lost their punch. For that reason, I find it instructive to reflect on my failures last year.

In the insurance sector, I was bearish on AIG (AIG), Ameriprise Financial (AMP) and St. Paul Travelers (STA), and I was too bullish on Montpelier Re (MRH).

There's no common factor here -- I simply misunderstood the fundamental cases, at least in the short run.

I was also wrong about auto-parts maker Dana (DCN). I broke my own rule by buying a company of medium-to-low credit quality when the industry as a whole was under stress.

Along with all of that, my commentary was too bearish on equities, too bearish on the dollar and too bullish on the 10-year note. Regarding currencies, read the work of Marc Chandler. He clearly has a firmer view of relative value in currencies than I do.

My Worst Sectors
Gains and losses are expressed as the percent that they changed the returns of my portfolio as a whole
Construction -0.7%
Timber/Paper -0.8
Agriculture -1.3
Consumer Durables -1.5
Auto Parts -1.8%

My Worst Investments
Montpelier Re -0.5%
Neenah Paper -0.5
Sappi -0.6
Dorel -0.7
Fresh Del Monte Produce -0.7
Furniture Brands -0.7
Dycom -0.7
Gold Kist -0.9
Lear -1.0
Dana -2.0

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AIZ $61.61 0.90%
ALL $71.08 -0.32%
APA $65.99 0.38%
CX $10.07 -1.90%
FDP $35.18 -0.87%

Markets

DOW 18,192.97 -21.45 -0.12%
S&P 500 2,110.75 +0.01 0.00%
NASDAQ 4,981.86 -6.03 -0.12%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs