As the holidays wind down, we reflect on the year that was and think ahead to the always-optimistic New Year's resolutions. A better-performing portfolio always ranks up there with a diet. So, to help with the portfolio (I've never been much help in the diet department), I present this New Year's Day the fourth edition of the Holiday Portfolio.
We entered 2004 on a very optimistic note. While there were moments of grandeur for the markets in the past year, it was not easy making money. Although many investors did better than 2004's iteration of the Holiday Portfolio, total return with dividend was in the double-digit range. That wasn't bad for a difficult year, but I always want better.
The past year's focus on total return did pay dividends, so to speak, and those dividends helped in the performance category. While dividends again will be part of the Holiday Portfolio, I think 2005 could be a surprisingly good year for the markets. That means dividends aren't likely to be as essential to solid portfolio return. Don't get me wrong; they remain important, but capital appreciation is likely to be more important in the coming year. That means not every stock I stick in this year's "fab five" has to pay dividends. Nonetheless, these stocks have to be solid companies that will be interesting to follow for the coming 12 months.
The concept of the Holiday Portfolio is simple. I select a group of five stocks that I think 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
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 longer 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.
So, as you get your portfolio -- and perhaps yourself -- in shape this year (remember, diets can't start on holidays!), take a look at the five stocks in this year's Holiday Portfolio.
While I'm always looking for new ideas, I begin the portfolio with two holdovers from the 2004 portfolio.
Equity Office Properties
, becomes the first stock to remain in the portfolio for three consecutive years. Equity Office was a below-average performer in the past year because of weakness in the office market and a lack of visible recovery in demand for office space, especially in Silicon Valley, where Equity Office acquired a large portfolio of office space just as the market softened near the beginning of the decade.
However, signs suggest that excess office capacity slowly is being occupied, and an acceleration in commercial economic activity should help the company with improved occupancy levels in the coming year. While it may be hard to move rent rates higher in the beginning of the year, it is likely that rates finally will begin to show signs of stabilizing and, in some regions, even firming later in the year.
In 2004, Equity Office began the process of optimizing its portfolio, refocusing on core regions and divesting properties in areas that weren't strategically important to the company's long-term strategy. That type of difficult decision-making is a hallmark of EOP Chairman Sam Zell, long known as a master real estate strategist. Now that Richard Kincaid has a season or two under his belt as CEO, the strategy should begin to reap dividends for Equity Office and its shareholders.
And, most importantly here, you get paid to wait. The current yield is a safe 6.8%. While I doubt the dividend will move higher in 2005, the $2-per-share payout is safe.
In short, I like the leverage EOP has to the commercial economic recovery, and I am very willing to bet on this management team to perform in a better office rental environment.
The second leftover is a bit more aggressive. While I am not convinced that now is the absolute right time to step in, I will keep
for another year. Clearly the fallout from Celebrex and
troubles with Vioxx have tainted the entire large pharmaceutical sector. And there is little doubt that Pfizer's troubles with Celebrex have been unfortunate for investors.
That said, this is a company with much more than just Celebrex. Drugs like Lipitor, Viagra, Zoloft and Zyrtec lead the parade of prescription medicines. And everyday names like Benadryl, Cortisone, Listerine, Lubriderm, Neosporin, Rolaids, Sudafed and Visine provide the nucleus of Pfizer's stable of over-the-counter health products.
Pfizer was the readers' choice last year, and it proved to be a real drag on the holiday portfolio. But for patient investors who understand and can tolerate the risks associated with drug safety issues as well as the challenges from generic drug manufacturers, Pfizer is an intriguing "fix-it" story.
And for the purposes of the Holiday Portfolio, it provides a great case study in trading behavior and corporate positioning. We'll spend a great deal more time on Pfizer in the coming weeks and months, but this is one where you think about nibbling today and building a position over time. It's sure to be a lightning rod for many, but it's one I want to keep a careful watch on for its instructive value in the months ahead.
For investors with less risk tolerance, I think a basket of Big Pharma stocks or the
Pharmaceutical HOLDRs Trust
is a risk-averse way to play the negative sentiment toward Big Pharma.
As I noted in
my outlook column for the energy sector earlier this week, I remain constructive on the energy complex.
provided a great boost for the portfolio in 2004, and I continue to own it as a solid core portfolio holding.
However, this year I will move down in size, looking for more capital growth in the energy space with
Superior Energy Services
. Superior owns a fleet of work boats in the Gulf of Mexico as well as a suite of oilfield services and rental tools that also are focused primarily on the Gulf, with some international exposure.
In addition, the company recently has created its SPN Resources division, which looks for late-lived production assets that also will provide the company with plug and abandonment (P&A) work when the wells dry up. The company's strategy is to take the P&A liability off the hands of exploration and production companies while at the same time looking for additional production potential in older fields, using its stimulation and workover services.
The leverage at Superior is to a continued acceleration of drilling and workover activity in the Gulf of Mexico. With clients like
looking to really push workover production in the Gulf of Mexico, Superior's boats and suite of workover and stimulation services will remain busy.
Combined with growth in contributions from SPN Resources, Superior easily could earn north of $1.05 in 2005. If it does and energy stocks remain in favor, Superior easily could trade into the low $20s during the coming 12 months.
Banking on Growth
While not a member of last year's portfolio,
is a familiar name to longtime readers of this column. This Minneapolis-based regional bank has grown significantly in the past five years through a number of mergers.
While action by the
on interest rates can be good and bad for banks, economic growth should help US Bancorp grow its commercial lending portfolio in 2005. This has been a source of frustration for the bank in recent years. After slipping for two years, loan demand finally firmed a bit in the second half of 2004. Assuming the momentum can continue and the company maintains a level of service that makes US Bancorp one of the more friendly super-regionals from a customer perspective, the company should be able to grow earnings by about 10%-11% in 2004.
Other sources of incremental growth could come from additional market penetration with grocery banks as well as an expansion of personal and corporate investment services.
US Bancorp currently yields about 3.9% with a dividend that has grown consistently in the past five years. If the bank begins to show better loan growth performance and trades back toward the median multiple for Midwest regional banks, the stock could move into the high $30s by the end of 2005.
It's Your Turn
I have several ideas for a good fifth name in the Holiday Portfolio, but every year, many of you suggest candidates to me. So,
send me an email with your pick to round out the Holiday Portfolio and your reasons that it should be included. The winner will be acknowledged appropriately, will be an integral part of the column on each 2004 market holiday and will receive a special
gift to memorialize the achievement. Just remember, you have to love your pick all year long!
Happy New Year, and let the portfolio begin.
At time of publication, Edmonds was long Equity Office Properties, ConocoPhillips and US Bancorp, although holdings can change at any time.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. 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 welcomes your feedback and invites you to send it to