Holiday Portfolio's Score: 5 Nice, 1 Naughty

 

For the holiday portfolio, it's time for a little December celebration.

While there is still a week left in the year, if the 2007 holiday portfolio were being judged by Santa it would be judged as nice ... very nice. In a difficult market environment, this diverse portfolio of five equities has done yeoman's work, collectively gaining more than 20%. That's even more impressive when you consider that one of the entries -- Bank of America(BAC) -- was down more than 21% year to date.

Before we drill down on the portfolio for one last time, let's review the purpose and process of the holiday portfolio.

From New Year's to Christmas

The concept behind the holiday portfolio is simple: I select a group of five stocks that I believe deserve watching over the next 12 months, and I follow them -- regardless of their performance -- throughout the year. I'll revisit the portfolio on each market holiday and, at times, make comments about the stocks in RealMoney's Columnist Conversation. The only way a stock is removed from the portfolio is if it merges with another company or ceases to trade on a major exchange.

The portfolio serves two purposes. First, it follows the fundamental progress of a group of stocks over a lengthy period of time. My hope is that the portfolio will serve as a forum for in-depth discussion of investment decisions and company strategy, and reinforce the importance of ongoing portfolio analysis. Second, it provides an opportunity to look at both short-term trading strategies and longer-term investment strategies with the same stocks.

Today, we take one last look at the five stocks selected at the beginning of 2007. Next week we start anew, with the 2008 edition of the holiday portfolio. Look for its debut in this space on New Year's Day.

Portfolio Cheer

If there was ever a doubt that sector diversity was a key to portfolio success, this year's holiday portfolio should be convincing. Even as the financials imploded and Bank of America provided a 20% hit, the 2007 portfolio has significantly outpaced the broader markets.

The winner -- by far -- in this year's portfolio is Carrizo Oil & Gas(CRZO). Carrizo, a Houston-based exploration company, has posted solid growth in production and reserves as it develops properties in the Barnett Shale and along the Gulf Coast. While it has been challenged by its attempts to enter the Floyd Shale in Mississippi, Carrizo hit major oil paydirt in a new exploration project in the North Sea. The company remains one of the more aggressive small-cap exploration companies with a large acreage portfolio. Carrizo's prospects remain solid, but investors need to temper expectations for 2008 after a prolific run over the last 12 months.

Altria(MO) remains a portfolio workhorse with solid free-cash-flow generation and regular dividend growth. This all-weather company continues to be a backbone of the holiday portfolio, and (hint!) don't be surprised to find this stalwart stock reappearing in future editions of the portfolio.

The surprise of the year may be Microsoft(MSFT). After several years of underperformance, Mister Softee benefited from increased traction for Vista and other software upgrades as well as a slow but steady PC replacement cycle. With a strong cash position and new leadership settling in, Microsoft may well be interesting into 2008.

Finally, Archstone-Smith(ASN), an apartment real estate investment trust, was acquired by a private concern in the second half of the year. It provided a modest gain for investors plus a solid dividend. REITs remain an important part of a diversified portfolio because they provide solid dividend income for investors.

Recent PricePrice 12/31/2006Price ChangeCurrent DividendCurrent YieldYield at Cost
Altria (MO:NYSE)*$77.43$64.4120.21%$3.003.87%4.66%
Archstone-Smith (ASN:NYSE)**$60.75$58.214.36%--0.00%0.00%
Bank of America (BAC:NYSE)$41.92$53.39-21.48%$2.566.11%4.79%
Carrizo Oil & Gas (CRZO:Nasdaq)$55.25$29.0290.39%$-0.00%0.00%
Microsoft (MSFT:Nasdaq)$36.06$29.8620.76%$0.401.11%1.34%
Unweighted Average22.85%2.22%2.16%
S&P 5004.78%
*Adjusted for Kraft transaction
**Purchase price in private transaction
Source: Company Reports, Bloomberg, TSC Research

Bah, Humbug

The financial story of the year has been the plight of the financial stocks. From the subprime implosion and the housing bubble to concerns over an economic slowdown, there are few banks that have been spared investor punishment.

Bank of America, the 2007 holiday portfolio entrant, is no different, down more than 21%. While many believe there is another shoe to drop, my bank sources suggest the worst may be over. With a nearly 5% dividend that appears relatively solid, the income stream is compelling. While you may not get dividend growth in the year ahead, investors are likely to get more clarity and stability in the financials.

That said, we get a lump of coal for this pick in 2007.

Happy Holidays

As we wrap up another year of the holiday portfolio, a big thank-you for reading. May your time with family and friends be filled with fond memories and may all of your wishes and dreams about the season come true.

>To order reprints of this article, click here: Reprints

At time of publication, Edmonds had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Christopher Edmonds is managing principal at Energy Research & Capital Partners, an energy investment firm and an affiliate of FIG Partners. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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