Good Eggs in the Holiday Portfolio

Today's edition of the Holiday Portfolio mostly offers a bunch of good eggs, with one exception. Large-cap names dominate the group, so performance has kept pace with the market during the first three months of the year.

Before I update what's going on with this year's crop of stocks, let's review the purpose of the Holiday Portfolio, which was designed to last all year long.

Brief Background

The concept 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 revisit the portfolio on each market holiday and, at times, make comments about the stocks on RealMoney's 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.

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.

I then listed the top five in a poll on Martin Luther King Jr. Day and asked for your final vote. With your vote, Pfizer ( PFE) was added to the Holiday Portfolio.

Now, on to the stocks.

Company/Ticker Recent Price Dec. 31, 2003 Price Change
ConocoPhillips (COP:NYSE) $70.00 $65.57 6.76%
Equity Office Properties (EOP:NYSE) 27.42 28.65 -4.29%
First Tennessee (FTN:NYSE) 46.26 44.10 4.90%
General Electric (GE:NYSE) 31.40 30.98 1.36%
Pfizer (PFE:NYSE) 35.67 35.33 0.96%
Unweighted Average Return 1.94%
Source: TSC Research

One Bad Egg

Before getting to the good news, let's start with the one challenged company in the group, Equity Office Properties ( EOP), an office-focused real estate investment trust with a 7% dividend yield.

As mentioned when I introduced this year's portfolio, Equity Office faced several challenges, such as pressured occupancy levels and lease rates and possibly stagnant property prices. Those issues remain, and I still think this stock is a second-half story.

In addition, real estate typically lags behind the broader economy, so occupancy and rents could get worse before they get better. The stock has been sluggish, and it felt more pressure this week after a Barron's article highlighted the company's struggles and raised the question of the dividend's safety.

However, as the largest publicly traded office REIT, Equity Office has the size and scale to benefit from an economic recovery, and I believe that Chairman Sam Zell will find ways to ensure that the dividend remains unchanged.

Because I want some exposure to the coming recovery in office properties, I'm willing to take the 7% yield and wait. Nevertheless, I don't expect the stock price to move much in the months ahead.

Making the Most of Advantages

The balance of the portfolio is doing about what I expected: slightly outperforming the market as each company continues to exploit its competitive advantages.

Take ConocoPhillips ( COP), for example, which is the best performer in the portfolio to date. Its focus on oil and natural gas exploration is in vogue, and the company is finding ways to improve operating efficiencies as it completes the long-term integration from the Conoco and Phillips merger.

Moreover, I like the company's multifaceted interest in the liquefied natural gas business. ConocoPhillips has recently indicated that it's looking at offshore storage facilities that could boost cash flows toward the end of the decade. The company has clearly benefited from the high price of oil and natural gas, and management seems to be doing the right things to grow the company and control costs.

General Electric ( GE) remains a proxy on the economy, with what I hope will be an occasional positive surprise, such as the jet engine contract with Boeing ( BA). That kind of announcement provides more evidence of GE's competitive advantage in a plethora of businesses.

Talk of finding ways to maximize the value of GE's financial services business could also boost interest. Also, I think you might get a surprise out of the power business this year. While I don't see a recovery in the sector, I do think GE has a number of ways to create revenue in the group, and wouldn't be surprised to see improvement by the second half.

Pfizer continues to move forward. In the first quarter, its earnings are likely to grow by about 10% with help from solid drugs like Lipitor. The company is also a cost-cutting machine and has been buying back stock, suggesting that earnings may show modest signs of growth in the coming quarters. It remains one of the best giant pharmaceutical companies.

Finally, First Tennessee ( FTN) has posted solid results so far this year by executing its business plan in its core southeastern markets. The bank is also making a transition into new markets such as northern Virginia, and that seems to be working well. The company's capital markets business is also strong and should provide growth this year.

Have a great holiday weekend.

At time of publication, Edmonds was long Equity Office and ConocoPhillips, 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

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