A new bull market for stocks is on the way. It’s not here yet, and probably won’t be for several months. You should use this pause as an opportunity to get your portfolio ready for the turnaround. In last September’s quarterly special report I identified 26 individual stocks of high quality companies that seemed ideal for long-term holding. Now it’s time to review that portfolio and determine if any changes are needed.
When I identified the stocks, it looked like the market slide was near its bottom. Unfortunately, the stock market and the economy began to tumble anew in November. The result is that so far the portfolio has a return of -15.57%. Things could be much worse, but I was expecting better at this point.
Remember we don’t sell a stock because of the market, the economy, or an industry. We purchased what I believe are leading companies that will do better than most regardless of economic conditions, and we aren’t trying to time the market.
We sell a stock if it becomes overvalued or appreciates so much that it becomes too large a portion of the portfolio. We’ll sell when a better opportunity is identified. We also will sell if it appears that I was wrong about the company or its business opportunity. A final reason to sell is that circumstances have changed: a change in management; the business plan; or the industry. A few of our stocks meet our sell conditions now, and I’ve uncovered some new opportunities for the portfolio.
Among our winners is Southwest Air. Amid a slowing economy and rising energy prices, LUV has appreciated over 32% since our purchase. LUV surged well ahead of the rest of the industry and likely has future good news already reflected in its price. I recommend selling your position in LUV. We might buy it back in the future.
Another winner to take profits in is Safeway. This premier supermarket chain racked up a 10% gain for us while most other stocks declined. Investors fled to safe, growing companies like this in the market downturn and have pushed the stock beyond the company’s fundamentals. I also believe there are better opportunities now. Sell Safeway.
Lucent Technologies should be sold for other reasons. Prior management did more damage to the company than was apparent last year. The company fell well behind the rest of the industry in bringing out new products, and there are reports of accounting irregularities. We’ll admit defeat on this one and move on.
I have a trio of companies to replace these three sales. One is a growth story, and the other two are bargains.
Start with Siebel Systems (SEBL). This firm is the leader in its software niche and the growth rate is extremely high. The slowdown in the economy affected the company’s numbers a little, but it has caused the stock to drop from around $110 to $60. The stock still is highly valued, but I recommend buying it at this discount from its recent high.
Cypress Semiconductor (CY) sells at a middling nine times earnings, but it has a history of strong earnings growth and product innovation with great management. The stock bounces up and down with the outlook for semiconductors, and it always has been a good move to buy during one of the down periods.
For a real value stock, take a look at USG (USG), which used to be U.S. Gypsum. The firm is the market leader in the wall-board that goes into all those new homes being built. The stock sold at over $45 last May, fell to $14, and now is down around $20. USG suffered because of asbestos lawsuit fears that appear to be overblown and also because of a drop in wall-board prices.
I think the asbestos fears are overblown and already reflected in the stock price. More importantly, USG is the most efficient producer in the industry and is an innovator. The stock sells for around three times earnings – too great a bargain for me to resist.
One other stock that deserves attention is Dell Computer. The stock took a big tumble in the last quarter of 2000 after it and other computer makers announced PC sales were well below projections. The high growth period of computers might be over, or this might be one of the periodic pauses we’ve seen in the past.
I still find reasons to like Dell. Its low-cost structure is letting it take market share from other computer makers. In fact, it recently took over as the top computer maker. Dell dominates the laptop computer market, which is growing faster and is more profitable than the desktop market. The move to faster-growing and more profitable servers also appears to be doing well. It will take about another year to know if these positive factors will overcome the slowing desktop computer market. I recommend giving Dell a year before making a final decision about the company.
In a web site update last November I recommended six additional stocks for those who have additional cash, not as replacements for those already in the portfolio. I still recommend purchasing each of these stocks.
Progressive Corp. (PGR) is a leading insurance company, primarily offering auto insurance. It had poor results the last few years because of high marketing expenses and declining insurance premiums. The marketing expenses now are paying off, and premiums seem to have hit bottom. It is a good time to buy.
Biotechnology stocks declined late in 2000 and appear to have hit one of their periodic bottoms. I like the leaders in this industry: Amgen (AMGN), Biogen (BGEN), and Genentech (DNA). The stocks are highly volatile, but the long term the outlook for each of these companies is bright.
If you want another stock like Safeway but with more potential, buy Royal Ahold (RHO). This firm owns a number of grocery chains and also is expanding in various food services, which have more growth potential and higher profit margins. It is an attractive company.
Another outstanding technology company is Adobe Systems (ADBE). This firm makes a number of high quality software products, including Acrobat, which converts computer files to a format that can be read on virtually any operating system. The stock declined sharply after my recommendation in November, when the company announced that the technology slowdown would reduce sales. The products and management of the company remain solid, and it is a good long-term purchase.
Naturally a number of the stocks recommended last fall are below their purchase prices. These declines are due to concerns about the economy in general. The technology stocks fared badly given the concerns about a major slowdown in technology spending.
Those factors refer to temporary economic and market conditions, not the basic business or management of the companies. I think investors overreacted and built a severe recession into the stock prices. If you held off buying these stocks last fall, this is the time to step up and buy. The full list is available on the web site archive and in last September’s quarterly special report.
Don’t sell any other stocks. We are invested primarily in leading companies in the fastest-growing industries – financial services, health care, and technology. We’ve avoided many overvalued “story stocks” without solid businesses. There is a temporary slowdown in the economy’s growth. Once interest rate cuts and tax reduction kick the economy back into gear, these stocks should appreciate more than the market. I’ve carefully selected companies you should be comfortable holding if the stock market closes down for the next three to five years.