Memorial Day brings the unofficial start of summer, and with it, another look at the 2006 edition of the holiday portfolio. Spring has not been kind to most of the portfolio, but there are reasons to believe summer may provide some respite. The concept of the holiday portfolio is simple. I select a group of five stocks that deserve watching over the next 12 months, and I follow them -- regardless of their performance -- throughout the year. Then I revisit the portfolio on each market holiday. 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 sit back and enjoy a day off in the middle of what has been a warmer-than-normal winter and a pretty volatile market, let's take a quick look at the stocks that make up the holiday portfolio and their almost midyear performance.
Spring FadeUntil three weeks ago, the holiday portfolio was moving right ahead with the broader market. Then inflation worries, growth concerns and market jitters began to impact all stocks, especially those in the holiday portfolio. When you get market action like you have seen in the last three weeks and a group of diversified stocks begins to underperform the market, it's important to think about a couple of issues:
First, has anything happened to change your longer-term outlook for companies in your portfolio? Second, is your strategy still valid in the current market environment? Start with the worst performer in the portfolio, Microsoft ( MSFT). The company remains a market leader in the software space, which should benefit meaningfully from a new cycle of hardware and software upgrades likely to accelerate in the second half of 2006 and into 2007. Cash balances and claims that the company has lost its competitive edge to smaller developers bear watching, but Mister Softee remains best in class. In addition, its cash provides the potential for an additional special dividend. Nothing has changed and the strategy still appears appropriate. Next on the downside list is Chesapeake Energy ( CHK). The company remains among the most prolific natural gas producers in North America and has hedged a significant amount of its 2006 and 2007 natural gas production at prices well above the current strip. As a result, returns on the company's drilling program will be robust, regardless of short-term volatility in natural gas prices. In addition, management at Chesapeake remains strong, notwithstanding the departure of co-founder Tom Ward after a long and successful run. While Ward's departure created an operational leadership void, it has been filled with a team of professionals who are well acquainted with the Chesapeake mind-set. Nothing has changed at Chesapeake, and while the natural gas markets could present challenges in the short term, the strategy remains correct. The other two laggards -- Altria ( MO) and General Electric ( GE) -- are generally in line with the market. If tradition holds, a dividend bump from Altria will come this summer (the cash generation and payout is the attraction to the company), and General Electric will continue to track the general economy over time, suggesting it will likely play catch-up at some time in the coming months. So, these two remain on track.
When you are a long-term investor -- the focus of the holiday portfolio -- it is important to remember you are becoming an owner of operating companies more so than simply investing in stocks. As a result, what is most important is understanding the underlying business fundamentals. A focus on the short-term stock fluctuation, while a part of the analysis, can sometimes prove more confusing than helpful. Although the stock prices are lower, the four businesses here remain solid operating companies with nice future prospects.
Banking on ProfitsThe holiday portfolio is a great example of the power of diversity. While four of the six stocks in the portfolio are lower, the power of Compass Bancshares ( CBSS) has kept the portfolio in the game. A solid credit portfolio, good growth in its core Southeastern markets and recent merger and acquisition activity in the banking world have pushed Compass shares higher. In fact, this week's deal between AmSouth ( ASO) and Regions Financial ( RF) again put the spotlight on Compass as a potential consolidation candidate among Southeast regionals. Finally, while Pfizer ( PFE) is a bit lower than it was during our look over the Easter holiday, the pharmaceutical industry should continue to be a part of a diversified portfolio. Hopefully, as temperatures rise, the holiday portfolio will warm up as well. Regardless, these picks remain a nicely diversified group of operating companies that should, over time, provide solid operating results. Enjoy your Memorial Day weekend.
|Company/Ticker||Recent Price||Price 12/31/2005||Change||Indicated Ann. Div.||Current Yield|
|Chesapeake Energy (CHK:NYSE)||30||31.73||-5.45%||$0.20||0.67%|
|Compass Bancshares (CBSS:Nasdaq)||55.5||48.25||15.03%||$1.56||2.81%|
|General Electric (GE:NYSE)||34.42||35.05||-1.80%||$1.00||2.91%|
|S&P 500 Y-T-D||1.97%|
|Source: TSC Research, Company Reports|