As a kid, there was nothing worse on the Fourth of July than when, with great anticipation, I lit the fuse of a gross of Black Cat firecrackers, ran like a gazelle and waited for the big bang. And waited.
Nothing -- a pack of duds.
Nothing describes this tape better: lots of waiting and lots of duds. Soaring commodity prices in the face of weakening consumer confidence and an anemic economy combine to provide little good news or optimism for equity investors.
The same is true for the holiday portfolio. So far, a bunch of duds. For these stocks, the best thing about the Fourth of July is they won't be trading.
Before we take a look at the portfolio, let's quickly review the rationale for the holiday portfolio.
Taking a Long View
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 periodically make comments about the stocks in
. 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 long period of time. My hope is that the portfolio will serve as a springboard 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.
One of the early lessons I learned is a mantra made popular by Marty Zweig: "Don't fight the tape." Indeed, the holiday portfolio and those who have remained blindly long are feeling the heat this Independence Day.
Whether it's the challenges in the credit market, the inability of industrial and technology companies to pass through rising input costs causing margin compression or simple investor malaise and multiple compression, nearly every company in the holiday portfolio is facing enormous headwinds.
Bank of America
, down more than 45% year to date. While the risks are obvious and the rewards difficult to see in the short-term, the bank appears at least a cut above those mired in the subprime crisis and seems to be positioning itself for solid consumer growth once the credit markets turn. And even if you can't count on the current yield of more than 11%, you should be able to count on half of that, making it an interesting contrarian play for an investor who can stomach the volatility.
The risk here is the unpredictable nature of the turn, and that's where discipline and style become so important for investors. If you aren't comfortable buying a stock that could drop 20% the day after you buy it, this market is tough to play. But if you start building a position and work into that position over time, you are likely to look back 12 or 18 months from now and feel pretty good about your results.
Advanced Micro Devices
may provide a similar outcome, albeit for slightly different reasons. In difficult markets, leaders tend to lead and followers tend to languish. For AMD, that is exactly what has happened. Until we get more confidence in the economy, investors who want more exposure to chips will move to
and avoid the others. Yet when the tech market begins to show strength, the secondary names will move, giving investors an opportunity to profit from AMD at current levels. Again, the biggest risk here is timing.
Cheniere Energy Partners
has been pinched by credit concerns, global competition for liquefied natural gas (LNG) and concerns that its parent company,
may face liquidity issues. A recent marketing contract with
should help, but the headwinds for a credit-challenged concern are even greater in a difficult market. The dividend remains escrowed through the balance of the year and should be covered by contracts beginning in mid-2009, but "should be" isn't necessarily good enough in this market environment.
Glimmers of Hope
is off about 10%, the recast dividend (after the spinoff) is solid and likely to grow. Moreover, the company remains a solid way to play the core consumer market. And if you include the spinoff of
Philip Morris International
in the analysis, the dividend and appreciation provide a bit of solace for investors.
Equity Residential Properties
is above water with a solid dividend. The reason for including Equity Residential in the portfolio was simple: The mortgage crisis and slowing economy will create less demand for purchased homes and more demand for rentals. Equity Residential's national footprint of moderate-to-upscale apartments is a good investment fit for today's challenges. In this case, the headwinds provide opportunities for Equity Residential.
This year's holiday portfolio, at least to date, is quite humbling. It becomes quite frustrating when you think your investment thesis for individual companies is correct, only to see broader issues turn the thesis upside-down.
Difficult markets, however, ultimately make better investors. Remember, it is important to stick to your discipline, but be nimble -- preserving capital should be the primary goal. There will be plenty of time to make money tomorrow if you preserve capital today.
We'll revisit these names as the Labor Day holiday winds down summer. Happy Fourth of July!
At time of publication, Edmonds had no positions in the stocks mentioned, 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;
to send him an email.