Every New Year brings resolutions and opportunities for renewal, and things are no different for the holiday portfolio. In the resolution department in 2006 we strive for an enlarged portfolio and a shrinking waist line. So, to help with the portfolio (I've never been much help in the diet department), I present to you the fifth edition of the Holiday Portfolio.
I began 2005 feeling relatively confident that the markets would provide opportunities, but uncertain as to the breadth of a market advance. While there were moments of grandeur for the markets in the past year, it was not easy making money. Many investors did better than 2005's iteration of the Holiday Portfolio, total return with dividends was close to 10%, and while that wasn't bad for a difficult year, 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 2006 could be a better year for the broader markets.
As a result, dividends aren't likely to be as essential to a solid portfolio return. Don't get me wrong. Dividends will be very important, but capital appreciation should provide better opportunities than over the past two years. 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.
All Year Long
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 some may think the energy cycle is long in the tooth, I think 2006 will be another good year for energy equities. The fact is, we have to continue to quicken the pace for natural gas exploration just to keep up with steady demand, and that means natural gas prices will likely remain strong.
While drilling companies like
and others should benefit, my energy pick for the 2006 holiday portfolio is
Chesapeake is the top independent natural gas-focused exploration and production company. Based in Oklahoma City, Chesapeake is focused on drilling a lot of natural gas exploratory wells through the nation's heartland -- from Kansas to Texas -- and now in the Appalachian Basin through a recent acquisition. The company's geological strength and scale in its core drilling areas provide a unique competitive advantage.
Moreover, the company has a seasoned executive management team that has consistently purchased stock, even as the price has doubled in the past year. If you want to invest with management, there is not another domestic company that has seen its management puts its own money behind its rhetoric.
Natural gas prices will not go straight up, and Chesapeake shares may be a bit choppy as we develop a new base price for natural gas. But the company's underlying reserves and production suggest the stock is trading as if natural gas were currently around $6 per mmBtu. Last I looked, natural gas was above $11 per mmBtu. Combined with a small dividend, that value makes Chesapeake an ideal candidate for the holiday portfolio.
Banking on Stability
This year's financial sector holiday portfolio company is
. Compass is an Alabama-based bank holding company with about $30 billion in assets and a franchise built from Florida to Arizona, with about 70% of its franchise spread across Texas, New Mexico, Arizona and Colorado.
The bank has a solid management team and a record of steady earnings and dividend growth. The nearly 3% yield and history of annual dividends provide a backstop in case the economy softens a bit.
That factor, combined with its steady growth prospects, could put Compass in play should bank mergers heat up. CEO Paul Jones will be 64 this year and is a major shareholder, and succession has been an issue for some investors, something a sale of the bank to a larger brethren would solve. Providing some precedent for such an act, SouthTrust sold to
last year, in part to resolve a succession issue.
Moreover, Compass shares are reasonably priced. Trading at about 13.7 times next year's earnings estimates, the shares trade consistent with the average regional bank. The SouthTrust sale occurred at about 17 times earnings, suggesting Compass could bring around $60 per share if the banking merger game should accelerate.
New Cycle for Microsoft
Two repeats make this year's portfolio.
, last year's readers' pick, returns as our technology pick. While there may be faster-growing technology companies, Microsoft's dominance, combined with my belief that we are on the cusp of another technology upgrade cycle, makes Mister Softee intriguing.
If there is a new round of technology upgrades, that means more core software sales. In addition, if there's a little bit of a boost from games and the potential of product upgrades, the next 12 months could be very interesting for the company. Of course, watch cash balances as another special dividend could make the prospects even more interesting for patient investors.
The other repeat is
. I'll admit, I'm the least sanguine on Pfizer than I am the rest of this portfolio but I believe there is a new cycle of big pharma innovations coming in the next year or two, and Pfizer is likely to be a leader in that process.
Yes, generics are a threat.
Yes, liability issues remain.
And, yes, the company has done nothing in the last two years.
Still, I want to be diversified and I want to be in the medical arena so Pfizer -- and its 4% dividend -- gets another chance.
More than Just Smoke
The final stock for the 2006 portfolio is
. We could argue without resolution about the ethos of investing in tobacco. If you don't like it, don't buy it. However, Altria is a moneymaker.
An ever-growing, 4%-plus dividend, strong consumer-based businesses and the ability to monetize its business all add value for Altria shareholders. It's been a core holding in my family portfolio for years and is likely to remain so in years to come.
It's Your Turn
On Christmas Day, I asked you to send your pick for the holiday portfolio. Here's one last chance before we pick the reader's choice before Martin Luther King Day. So,
, the reason you like the stock, and your name and hometown. I look forward to another holiday adventure in 2006.
Have a safe and prosperous New Year!
At time of publication, Edmonds was long Altria, Pfizer and Chesapeake Energy, 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.