Building a portfolio for a world turned upside down
Throw out your assumptions about what works in a portfolio, says this U.S. advisory, and and pick stocks for a changing economy, like these four.
All those with a short attention span, pay attention!
This is not the market for you.
The way to make money in these turbulent times, a top U.S. advisory tells us, is to carefully craft a portfolio and watch it like a hawk.
And that portfolio should only contain those investments whose “special characteristics” allow them to thrive in today’s market.
Mr. Stephen Leeb, editor of The Complete Investor, describes exactly how such a portfolio should be put together.
Throw aside all your assumptions about what works, he says, and start investing with an open mind.
He also has what he calls four “stellar growth stocks” that he believes are a perfect fit for a profitable portfolio right now.
We’ll put the cart before the horse. We’ll examine the four stocks Mr. Leeb likes. Then we’ll see how they fit into a portfolio for today.
Sturdy protection
The tougher the times, the more selective you must be, this editor insists. In times like today, “you need a supremely well-crafted portfolio with investments — and only those investments — that benefit from identifiable economic trends and protect you against the most likely economic ills.”
What could offer sturdier protection against economic ills than a stock called Iron Mountain (NYSE-IRM)? And indeed its mandate is to protect information and store documents. Or destroy them — its shredding trucks are not a rare sight on big city streets in Canada as well as the U.S.
In fact, the company operates in 36 countries. Its clients include 90 per cent of the Fortune 1000 companies and 90 companies on the London stock exchange. Developing countries will help “spur very rapid growth over the longer term.” Iron Mountain should return to its $40 high in the next 12 to 18 months, Mr. Leeb predicts. It trades around $25 now.
The health care bill that will ultimately be signed into law in the U.S. is bound to benefit drug distributor McKesson (NYSE-MCK). It draws 95 per cent of its revenues (but still just 72 per cent of its profits) from this activity. “The aging population and the likelihood of more people having health care will translate into more drug prescriptions,” says Mr. Leeb.
The company should enjoy low double-digit growth, he adds, accelerating as technology picks up the pace. The stock has been moving up smartly and now trades around $64.
Total dedication to shareholders
A rather unique holding is Loews Corp. (NYSE-L) — not to be confused with home improvement chain Lowe’s. This company has controlling interests in CNA Insurance, a top property and casualty insurer, and Diamond Offshore, the world’s second largest deep-water oil driller. It has a number of other holdings as well, mostly in energy.
“It makes our short list,” the editor says, “because of the international nature of its business, its heavy emphasis on energy, and perhaps most important, its total dedication to providing shareholders with the highest possible returns.” It has retired more than 30 per cent of its shares.
The stock trades at a deep discount to the sum of its parts. Nonetheless, it has been rising steadily and stands at $36.
Not least, there is a “small but solid franchise in foods” whose name you probably know (and couldn’t easily forget), Smucker’s (NYSE-SJM). 75 per cent of its sales come from products ranked number one in their category. “The company also gets high marks for the quick and accretive integration of its biggest ever acquisition, Folgers coffee,” says Mr. Leeb.
Smucker’s has sailed through difficult times, he adds, and should keep on growing. With its pristine balance sheet, it is primed for further acquisitions. It, too, has been moving up the charts, and trades at $52.
Ignore past assumptions
Into what kind of a portfolio do these stocks fit? To start with, Mr. Leeb says, ignore past assumptions about basic asset classes — stocks, bonds and cash.
Things are not going to work the same way. If you’re counting on 9 to 10 per cent returns from the S&P Index, he says, and 4 to 6 per cent real returns, you’re going to be disappointed.
The world is changing. Right now, global economic output is fairly evenly balanced between the developed world and the developing one. This will not last.
Population is five times greater in the developing world and per capita GDP is 80 per cent lower. “Five years from now the developing world’s GDP could easily be 20 per cent greater than the developed world’s and yet still be poised for comparable growth for at least another generation.”
The developing world is “ravenous” for natural resources, the editor adds. Thus whatever resources the developed nations conserve, the emerging economies will simply consume.
“The only real solution,” he says, “is to develop alternative energies on a large enough scale to enable development of new sources of other vital commodities.”
A world turned upside down
The pressure on resources will only get greater, as will the tennis match between inflation and deflation. In the face of these upheavals, Mr. Leeb reiterates specific actions this advisory recommends for its readers.
Buy gold, the best-performing asset this decade. Hedge your investments with zero-coupon bonds.
Do not, under any circumstances, buy an S&P Index fund — this investment has no credibility in a world turned upside down.
But even the “nearly moribund” S&P has some “great companies and buys,” says Mr. Leeb. So do buy growth stocks that have returned 10 per cent since the beginning of the decade. Make sure they are strong franchises with an international reach. Like the four named above.
It does seem like a good idea to pay attention as the world changes. After the turmoil of the last two years, change can’t be all bad.
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