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.
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 ( PPH) is a risk-averse way to play the negative sentiment toward Big Pharma.
my outlook column for the energy sector earlier this week, I remain constructive on the energy complex. ConocoPhillips ( COP) 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 ( SPN). 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 El Paso ( EP) 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.
While action by the Federal Reserve 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.
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 TheStreet.com gift to memorialize the achievement. Just remember, you have to love your pick all year long! Happy New Year, and let the portfolio begin.