Stocks to Hold for the Long Run

We are coming up on the one year anniversary of our portfolio of 15 stocks for the next decade.

For those who want to own individual stocks in addition to mutual funds, I created a portfolio of 15 companies that you should be comfortable owning for the next decade. This is not a trading portfolio, and we aren’t worried about the quarterly results. These are well-run companies that have proven themselves over time, and that I believe are likely to continue performing better than average. A stock stays in the portfolio unless its long-term profit dims.

Because the hold-ings are long-term, this portfolio can be a portion of your U.S. stock position in the Core Portfolio. Or you can set it up as a separate portfolio to supplement the Core and Managed Portfolios.

New investors, don’t ignore the buy prices. Wait for an overvalued stock to come back to my buying range.

So far, overall results have been a little ahead of the market indexes.

The most significant change since our last review is the significant correction in St. Joe. This real estate development company is the largest landowner in Florida and no doubt is suffering from fears about a real estate bubble plus the effects of the hurricane season.

St. Joe’s reports that the hurricanes did not have a significant effect on its properties and development projects. It also reported generally strong demand for its homes. Prices are significantly above those of one year ago. One cause of concern for investors is an increase in its inventory of resort homes for sale in northwestern Florida. In addition, there are concerns about the extent to which the rebuilding to take place in the Gulf region will increase the cost of construction materials and labor for Joe’s operations.

The correction brings the stock back to into my purchase range. Any effects from the hurricane will be short-term and do not change the bright prospects for this long-term investment. Because of the firm’s deliberate, planned development program it will be able to ride out fluctuations in the Florida housing market. This is an opportunity to buy a long-term winner at a good price.

An analyst downgrade and concerns about Harley-Davidson’s 2006 product line triggered another decline in that stock. The stock spent the summer recovering from last spring’s decline. In the last half of September, the stock fell back to its spring lows after an analyst reported that consumers were responding unenthusiastically to the new models and inventory was building. There also are several lawsuits against the company related to the stock decline last spring.

I suspect this was an over-reaction by one analyst and that any slowdown is not due to a lack of enthusiasm for Harley’s products. Harley’s customers probably were distracted by the hurricane season and the enticing deals offered by car manufacturers over the summer. Yet, Harley is the biggest question mark in this portfolio. I’ll keep an eye on sales for the 2006 models to see if there is a real concern about Harley’s long-term prospects.

Starbucks and Apollo Group remain solid companies with volatile stocks. Each company continues to execute its long-term program well and warrants a purchase for long-term holding when below my price target.

Illinois Tool Works steadily goes about its business of acquiring and improving companies in related manufacturing businesses. Its revenues and earnings continue to increase in line with expectations. Investors do not seem to be attracted to the stock these days. Don’t let that worry you. The company is growing nicely and is very attractively valued at recent prices.

Elsewhere in the portfolio, we have had some big winners.

Whole Foods is taking a break from its spectacular climb over the last year. The company has found a profitable niche in the otherwise low margin grocery business. Unfortunately, it became a bit of a fad among investors. Over the summer the price went above my purchase level, and the price-earnings ratio went over 130.

We’ll continue holding the stock, because the company is performing well. But new investors should not buy at recent price levels, and those who already own the stock should be prepared to see a decline in coming months.

XM Radio climbed rapidly out of the cellar of our portfolio. The satellite radio company now has more than 5 million subscribers and is growing rapidly. Over the last year the stock has been in a wide trading range. One’s return depends on when the stock was purchased. Expect continued volatility and purchase the stock only during one of the downswings.

Progressive continues its market growth in the auto insurance business. The firm revolutionized the market by applying the sophisticated pricing and underwriting practices it developed in the “high risk” auto insurance market to the general market. The company also is very efficient. It makes a lot of Internet sales. It keeps policyholders content with solid customer service. Recently it broadened its customer base by selling through independent insurance agents.

Solid gains in Lennar and Plum Creek Timber indicate that stock investors aren’t concerned yet about a real estate bubble, at least in the markets these firms are in. Lennar is a premier homebuilder. Plum Creek owns a lot of timberland. It has a dividend yield of over 4% that will tide you over through periodic declines in the stock, plus the potential for strong capital gains over the years.

The rest of the portfolio consists of solid, well-run companies. Of special note is WalGreen. This drug store chain usually is highly valued because of its consistent long-term growth in revenues and profits. The trick is to buy the stock at a good price. That is possible now, because the stock suffered a decline over the summer. If you don’t own it, buy WalGreen before the stock returns to its long-term valuation levels.