Despite chaos in the financial markets and murky economic trends, the market-beating gains from my 50 Best Stocks in the World portfolio show that you can still ignore all that stuff and just concentrate on buying and holding the best stocks.
At least that's the evidence from nine years of this long-term portfolio. Buy and sell just once a year and keep turnover at those annual revisions to just 10%. (That's five buys and five sells out of a portfolio of 50 stocks.)
Then hold -- and count your gains.
The gain on the 50-stock portfolio as of the market close Sept. 20 was 20.66% for the previous 12 months. That beat the 14.83% gain of the
Standard & Poor's 500 Index
and the 18.37% gain of the
Nasdaq Composite Index
And it has worked out just fine during the nine years that I've run this portfolio. For those years, the 50 Best Stocks in the World portfolio is up 70.96% vs. a 49.12% gain for the S&P 500 and a 59.74% gain for the Nasdaq Composite.
By the way, you can do even better than this by following macroeconomic trends and picking sectors that benefit from those trends. But that style of investing takes more work and time than many people have. And it's a more aggressive style, with bigger ups and downs, than many investors are comfortable with.
Another alternative is using a buy-and-hold portfolio such as the 50 Best as the core of your portfolio and then adding what I call edge positions around that core, to the degree that fits your investing style, time horizon, investing goals and sensitivity to risk.
But if neither alternative fits your needs, it's good to know that you can concentrate on old-fashioned, blue-chip stock-picking and still beat the market.
Picking and Choosing
The theory behind the 50 Best Stocks in the World is pretty simple in outline. The goal, as I put it when I started the portfolio in September 1998, was to compile a list of 50 blue chips that earned that often-too-easily bestowed moniker because:
- They had truly outstanding opportunities for global growth ahead of them over the next five or 10 years.
- They had a competitive edge that would allow them to seize the lion's share of that global opportunity. This is critical in the selection process.
Notice that there's nothing in that formula that takes account of the ebbs and flows of a sector's popularity. When I pick the best stocks each year and decide which stocks to drop, I'm not looking at sector momentum or trying to guess the direction of economic trends over the next year or five years.
Given all of the short-term information, advice and just plain noise thrown at investors these days, it's hard to clear your head and concentrate on the long-term
fundamentals of a company.
Sizing Up Pfizer
, a longtime member of the 50 Best portfolio. It's clearly out of favor with investors. The stock's chart stinks: The 50-day moving average has just fallen through the 200-day moving average, and that is usually a sign of more trouble ahead.
Wall Street projects Pfizer earnings growth of just 2% in 2007, making the
price-to-earnings ratio of 11.7 on projected 2007 earnings seem wildly inflated rather than a bargain.
But from the long-term perspective of the 50 Best Stocks in the World portfolio, all of this is beside the point. The stock earned its way onto the list in 1998 because Pfizer had the best sales force in the pharmaceutical industry. That salesforce was so good at marketing drugs that other drug companies rushed to partner with Pfizer.
Add to that competitive advantage the edge that came from having more than $10 billion in cash flow a year -- enough so the company could fund a lot of internal research and development and buy promising drug candidates that were developed at other companies -- and you had a worthy buy-and-hold stock.
Now, however, the buy-and-hold investor has to answer two questions about Pfizer:
- Has either of those two competitive advantages decayed enough to make this company just, well, ordinary?
- Has the industry changed so much that other competitive advantages are now more important in determining a company's long-term success?
Those aren't exactly fall-out-of-bed-easy questions to answer, but I would argue that they are a lot easier to get a handle on than figuring out whether U.S. economic growth is going to speed up, slow down or grind to a stop over the next nine months.
I'd answer those two questions this way:
First, Pfizer still has the best salesforce in the business, although it has cut that army's size during the company's recent struggles, and it's still got gobs of cash flow and a heap of cash from selling its consumer-products division to
Johnson & Johnson
Second, though cash flow counts more than ever, since finding a new blockbuster drug is more expensive and seems harder and riskier than a decade ago, the competitive advantage provided by Pfizer's industry-leading sales force has slipped behind the advantage it would have if it ran the industry's best research-and-development lab.
The key test facing any drug company for the next decade is developing (and/or buying) enough drugs to:
- Make up for any patents expiring.
- Keep the sales force busy.
- Push up revenue and earnings by the kind of 10% growth that investors in drug stocks still look for.
On its record, Pfizer hasn't been particularly good at turning big research-and-development spending into new drugs.
used to be the industry's best at research and development, but it has stumbled recently. The crown in that area has passed to
, which holds a virtual HIV drug franchise and developed cash cow Tamiflu with
. Gilead is also on the verge of adding drugs for hypertension and hepatitis that would significantly broaden the company's product line.
By the way, Gilead is no sluggard when it comes to cash flow either, generating $1 billion in the first half of 2007.
On the basis of those competitive advantages, I'm adding Gilead to this year's 50 Best list and dropping Pfizer.
Four More Drops
The same kind of analysis is behind my four other drops this year:
- Duke Energy (DUK) - Get Duke Energy Corporation (DUK) Report. The competitive advantage in the utility industry has shifted to companies with big unregulated power-generation businesses that emphasize nuclear and alternative technologies, such as wind power.
- FedEx (FDX) - Get FedEx Corporation Report. Global competitors such as United Parcel Service (UPS) - Get United Parcel Service, Inc. Class B Report have caught up with FedEx, and smaller niche competitors have taken a leaf from the company's book by adding technology to match its logistics capacity.
- Southwest Airlines (LUV) - Get Southwest Airlines Co. Report. The low-cost, short-haul model that Southwest pioneered has been adopted so widely that it's not enough of a competitive advantage to justify keeping the stock in this portfolio.
- Walgreen (WAG) . In response to fierce competition, the company has moved away from its core competency of running the best drugstores in the best locations to pursue a strategy built on acquisitions in the pharmacy-services sector.
Five to Add
To balance these five drops, I'm adding Gilead Sciences, as noted above, and:
- Accor, the leader in the international budget-hotel segment.
- EMC (EMC) , the best in the storage industry at integrating hardware and software.
- FPL Group (FPL) - Get First Trust New Opportunities MLP & Energy Fund Report, the leader in the unregulated business of generating electricity from wind in the U.S.
- Nvidia (NVDA) - Get NVIDIA Corporation Report, the last independent graphics-processor company standing.
When I give this list its annual update and revise sporadically during the year, I designate up to 10 stocks that are attractively priced for purchase. As of today, I've got seven stocks that I'd give a buy rating: Accor,
, Gilead Sciences,
Whole Foods Markets
Below is the complete list of the 50 Best Stocks in the World:
Procter & Gamble
Johnson & Johnson
At the time of publication, Jim Jubak owned or controlled shares of Corning. He did not own short positions in any stock mentioned in this column.
Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;
to send him an email.