The joys of Thanksgiving. A time to talk turkey, watch football and, of course, review TheStreet.com's holiday portfolio.
Some lessons are easier learned than others.
At this time a year ago, I penned the following: "There is plenty to be thankful for in this year's portfolio, especially when you consider that one turkey --
-- is down over 20% (more on that later). In total, the portfolio has worked just about as I had hoped -- good balance between dividends and growth."
Fast forward one year, and the message is the same: The holiday portfolio has worked beautifully, showing that diversification -- meaning owning quality equities across various economic sectors (not necessarily just a lot of stocks) -- provides one of the better methods for stable, less volatile growth of an equity portfolio. The holiday portfolio is only five stocks, but stocks that represent diverse economic sectors, and it has again -- even with the ghost of Pfizer -- provided better-than-average performance.
This portfolio was built on the premise that the pieces for a solid economic environment were in place, but high energy costs could affect that growth. In addition, while I hoped the
policy would be accommodative, I wanted companies that could perform regardless of what the Fed might do. As such, I was hoping to combine the stability of income-producing equities with companies that were poised to benefit from economic growth with the income providing a "hedge" if my theory was a bit off. Pfizer hasn't worked; the others have.
Before I take a closer look at the five members of the portfolio, let's quickly review the purpose of this exercise I call the holiday portfolio.
I created the first holiday portfolio three years ago, hoping to craft an occasional column (for those looking for something to read on market holidays) that would track a concentrated portfolio of core equities for an entire year. In doing so, it gives me (and you) the chance to think longer-term about the fundamentals of a company's business as well as its industry. We follow the stocks in the holiday portfolio -- regardless of their performance -- throughout the year. 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.
Not only should the portfolio serve as a forum for more in-depth discussion of investment decisions and company strategy, it should also serve to reinforce the importance of ongoing portfolio analysis. In addition, through occasional comments on the stocks in the
Columnist Conversation, it provides an opportunity to look at both short-term trading strategies and longer-term investment strategies with the same stocks.
This year's twist is the readers' selection. On New Year's Day, I asked you to review the stocks you routinely follow and send me your best idea for the portfolio. This year's reader's choice was
One thing this portfolio is not is a "swing for the fences" attempt to beat the markets hand over fist with a high-risk strategy. Rather, for more "core equity" forced investors, this portfolio is truly "buy and hold" with no way to exorcise a stock from the list during the year.
With that in mind, let's take a look at what has happened to date.
This year, Pfizer was simply a wrong pick. However, it was wrong for interesting reasons. I continue to believe that Pfizer is a solid company with one of the premier pipelines of new pharma offerings and one of the top consumer over-the-counter lineups. However, this has little to do with the company and everything to do with the stock. Pfizer is a broken stock. As Jim Cramer said this week, Pfizer is in the "House of Pain, and there is no reason to buy or own a stock that goes down almost every day."
Don't get me wrong: Pfizer will live to play another day, and very patient investors are likely to be rewarded from current levels. However, until the investing environment for Big Pharma improves, Pfizer will be the the poster child for broken stocks. Nothing more, nothing less.
Stronger Into Year-End
While both Microsoft and
have been portfolio laggards this year, things are looking up for both as we enter the 2005 homestretch.
Mister Softee has begun to get some attention with new product announcements and opportunities for innovative offerings into the New Year. While the law of large numbers continues to challenge Microsoft's growth, it remains a cash-generation machine and one that is likely to continue creating shareholder value into 2006. I like the position of the company here as it remains the premier software company and technology service company in the world.
US Bancorp should benefit from the Fed's release earlier this week that it now is focused on making sure restrictive monetary policy does not go too far. In addition, the bank continues to make progress in credit quality and streamlining operations after a series of mergers over the past three years. In fact, it is now just as likely that US Bank would be acquired by a super-regional as it is that it continue its acquisition program. I'm not suggesting that will happen but simply noting that it is of a size and with a geographic footprint that puts it in the mix when such deals are on the docket.
The two workhorses of this year's portfolio continue to do solid work.
Superior Energy Services
has been the best performer in the group as energy remains hot. Superior has a balanced business, the largest portion of which is focused on providing completion services for exploration-and-production companies, primarily in the U.S. and Gulf of Mexico. The company has a host of services, from a fleet of work boats to rental tools and complete stimulation services. In addition, the company has a growing, mature production business, where it acquires late-lived production fields in the Gulf of Mexico while at the same time assuming the "plug and abandonment" business -- the deconstruction of infrastructure once all oil and gas have been produced. This business felt the impact of Katrina and Rita with production falling sharply, but it also will gain longer-term opportunities as a result of the storms.
Equity Office Properties
has served as a solid citizen in this portfolio for multiple years. And every year it has provided exactly what the portfolio needed: stable growth with a solid dividend. While some will argue the real estate market is getting more difficult, economic growth should continue to benefit Equity Office and its portfolio of high-quality commercial office space. The dividend is solid, and that's why I own it.
We will take one final look at the holiday portfolio on Christmas Day and introduce the 2006 portfolio. Hopefully, we'll get a little uptick in Pfizer and finish the year strong.
Until then, I'm truly thankful for a wonderful family -- especially my 1-year-old daughter Margaret Christine -- my colleagues at
and all of the wonderful relationships I have built over the years with readers like you, a real community of people who have come together to learn more about finance and the markets. There couldn't be a better gig in all the world.
Have a very happy and safe Thanksgiving.
At time of publication, Edmonds was long Equity Office Properties and US Bancorp, although holdings can change at any time.
Christopher S. Edmonds is a partner and managing 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 appreciates your feedback;
to send him an email.