Holiday Portfolio: The Benefits of Diversity

How quickly a sloppy market can make us forget about that "Happy New Year" greeting just three weeks ago.

The credit markets, the economy and a somewhat gloomy start to earnings are a difficult trifecta to overcome. And the performances of the broad market averages are indicative of just how difficult this tape has become in such a short period of time.

Alas, the holiday portfolio has not been spared. However, the diversity and dividend focus will help these five stocks muddle through. Before we take a look at the carnage, let's take a quick look at the rationale behind this annual exercise.

All Year Long

The concept behind the holiday portfolio is simple: At the beginning of each year, 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 revisit the portfolio on each market holiday and, at times, make comments about the stocks in 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 lengthy 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.

Tough Tape, Tough Love

One thing that a difficult tape tends to do to investors is restore discipline and eliminate complacency. It should remind each of us that investing is serious, that bad decisions have consequences and that laziness begets losses. While very few investors have enjoyed the last three weeks, those who have done their homework, stuck to their disciplines and remained nimble probably are feeling less pain than others.

Remember that each year I attempt to create a basket of five stocks from diverse walks of life that will weather the storm better than the market. To do so, I stick to what I know best: core stocks with solid, relatively stable growth potential, that fit my view of the macro-environment. Most of them will also pay dividends.

That doesn't mean I'm always right, but it does mean that I will always try to stick to my knitting. What you aren't going to see in this group of stocks are "highflying, speculative" names that have very little but hope on which to peg their future. Now let's quickly look at the five stocks and the diverse elements they bring to this portfolio.

Altria ( MO) needs very little explanation. Here is a diversified consumer staples company that has great product-line and geographic diversity, is only minimally affected by economic fluctuations and continues its tradition of ever-increasing free cash flow and dividends. While there is some regulatory risk, this is a company that has proved to be an all-weather stock. It gives us exposure to consumers in good times and bad with an incredible ability to regularly increase its payout. I want to be here in a difficult tape.

Advanced Micro Devices ( AMD) is our cheap way to play the technology game. While not very likely to claim the dominance of its bigger brother Intel ( INTC), the stock was incredibly beaten down at the end of 2007 and should be a better relative performer than its brethren in 2008. While down so far this year, it has held up better than most tech names.
Holiday 2008: OUCH!
Hard to Find Places to Hide; Dividends At Least Help!
Recent
Price
12/31/2007
Price
Change Current
Dividend
Current
Yield
Advanced Micro Devices (AMD:NYSE) 7.03 $7.35 -4.35% -- --
Altria (MO:NYSE) 76.07 $76.00 0.09% $3.00 3.94%
Bank of America (BAC:NYSE) 36 $41.42 -13.09% $2.56 7.11%
Cheniere Energy Partners (CQP:AMEX) 16.7 $15.80 5.70% $1.70 10.18%
Equity Residential Properties (EQR:NYSE) 32.7 $37.04 -11.72% $1.93 5.90%
Unweighted Average -4.67% 5.43%
Source: Company Reports, Bloomberg, TSC Research

Cheniere Energy Partners ( CQP) is the Master Limited Partnership that will own the physical assets built by its corporate parent, Cheniere Energy ( LNG). Cheniere's first LNG terminal along the Gulf Coast is scheduled to take its first shipment in the first half of this year. It then will be utilized by Chevron ( CVX) and Total ( TOT) under 20-year contracts. The current 10%-plus dividend is prefunded for this year and then secured by the Chevron and Total contracts in the future. The yield was the attraction here and, to date, this strategy has worked nicely.

Equity Residential Properties ( EQR) is an apartment Real Estate Investment Trust with "middle class" apartment assets from coast to coast. While some would argue a slowdown in the economy could impact performance, I will argue that I want to own rental real estate when ownership becomes more difficult. In addition, if I am going to play the real estate game in a difficult market, I want Sam Zell, Equity Residential's chairman, on my team. The dividend should be safe, so even with the recent swoon in Equity Residential's shares, I can sleep at night.

That leaves Bank of America ( BAC). It seems prudent to begin to gradually build exposure to financials now, although the stock is down 13% since the beginning of the year. Remember, this is a year-long process and rate cuts and economic stimulus should benefit these stocks by the end of the year. I may not get back to even until the second-half of the year, but I like the chances of this large bank, which doesn't seem to have the exposure to the massive issues of Citigroup ( C) and others. That said, caution says Bank of America isn't out of the woods. Walk carefully and do your homework as you think about this one.

That's a quick look at our five stocks three weeks into the year. In difficult markets like this, I have always stressed three key investing tenets: (1) Stick to your discipline -- know what you know and, more importantly, know what you don't know and plan accordingly; (2) Be patient but nimble -- assess what is transient and what is more permanent. Transient displacement creates opportunity; permanent displacement creates bad investments; and (3) Keep it simple -- blocking and tackling will leave you standing to play another day. Don't try to overanalyze, get cute or make moves in attempt to "make up" for past mistakes (see No. 1, above).

This too shall pass; for now, your job as an investor is to make sure you remain in the game when it does.

Enjoy the holiday.

At time of publication, Edmonds was long CQP, although holdings can change at any time. Edmonds' firm also provided investment banking services to Cheniere in the past 12 months.

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; click here to send him an email.

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