Buy and forget is not a viable strategy in a volatile market. But with periodic tweaking, a portfolio can capitalize on global trends with long life spans, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Ten long-term picks for 2013? In this market? You've got to be kidding. There's just too much volatility.
Precisely. Which is why long-term investing can make sense in this market. All that volatility can give you opportunities to buy great long-term stocks when everybody else is—for the moment—running for the hills.
But...and it's an important but...the kind of long-term investing I'm talking about isn't buy and forget. It's not even exactly like traditional buy and hold.
I'd call it buy rarely and sell seldom. But do pay attention to the potential for wild swings in a market ruled by central bank cash flows.
I don't think it matters a whole lot whether you use something as traditional as dollar-cost averaging or a more complex system of market timing. The key is to find stocks of good companies that are positioned to ride trends of ten years or more.
You buy more shares when the companies are out of favor. You sell completely when the company shows signs of losing its way, or when the trend itself changes. If you want to increase your potential returns, you can sell partial or entire positions when the fundamentals say a stock is overvalued, or when technical analysis says momentum is fading.
This is the system behind my December 2008 book Jubak's Picks (still available used from places like Amazon.com and Powell's Books. Since January 2009, I've run a portfolio built on this system. Every year I've done an update, buying five new stocks and selling five old picks out of the 50-stock portfolio.
The update for 2013 is a little late this year—May 3—but in this column you'll find this year's five buys and five sells.
And you'll find something a little different too—a continuation and extension of something that I introduced into the portfolio in January 2012.
In that update, I not only gave my five buys and five sells—but I also picked the five stocks from the portfolio that I thought would perform best in 2012. In essence, I created a list of ten long-term buys for the year out of the larger 50 stock long-term portfolio.
In this piece, you'll find my ten long-term buys (five new buys and five picks from the existing portfolio) for 2013. But before I go into a summary of this system and the specific buys and sells, let me give you some performance numbers. After all, why pay any attention to this system if the results are terrible?
For the life of that total portfolio—that's the whole 50 stocks, taking into account annual revisions—the Jubak Picks 50 has returned 64.4%. That trails the 72.3% return on the S&P 500.
The problem? The kind of volatility that has driven so many long-term investors either to other strategies or out of the market completely.
In 2011, commodity prices tanked, and that took the Jubak Picks 50 down too. The return on the portfolio that year was a loss of 18.6%, against a gain for the S&P 500 of 2.1%.
It was exactly that volatility that drove me in January 2012 to create and track an annual portfolio of ten long-term picks from the larger portfolio. Since the beginning of the Jubak's Picks 50, I'd been advocating that investors occasionally buy and sell inside that larger portfolio, depending on market conditions. But I hadn't given any specific picks to help guide the transactions.
In January 2012, I did. The return on that portfolio of five new buys and five best picks from the existing portfolio came to 16.6% in 2012. That slightly beat the 16% return on the S&P 500 for the year, and it hands-down beat the 6.6% return for the Jubak Picks 50 as a whole.
So with that set-up, let's get down to the portfolio and the ten long-term picks for 2013.
Picking the Trends
I'm not going to rehash the strategy behind the Jubak Picks 50 here. In a nutshell, the idea was to see if a buy and hold-ish strategy would pay even in times of extreme stock-market volatility.
The premise of my book was that by picking trends with long lifespans (10 years or more)—such as the growing demand for food and especially protein as developing economies get richer—a buy or hold investor could beat the market even if the individual picks used to buy into those trends were sometimes clunkers.
Because markets and companies do change, I'd tweak the portfolio once a year. But not a very big tweak. I'd sell no more than 10% of the portfolio (five stocks) and buy no more than 10% (five stocks) of the portfolio. For more detail on how the portfolio is built, you can see last year's post or dig up a used copy of my book.
In the January 2012 revision, I dropped Central European Distribution (CEDCQ), Deltic Timber (DEL), EnCana (ECA), First Solar (FSLR), and Kinross Gold (KGC). The 2012 results for those stocks were, respectively, -50.4%, +17.4%, +11%, -8.6%, and -13.3%. The average loss for those five drops was 8.8%.
In the January 2012 revision, I added Home Inns and Hotels Management (HMIN), Lynas (LYSDY), Pioneer Natural Resources (PXD), Weyerhaeuser (WY), and Yamana Gold (AUY). The 2012 results for those added stocks were, respectively, +12%, -43%, +19.2%, +52.3%, and +18.8%. The average gain was 11.9%.
And finally in the January 2012 revision, I picked five stocks, in my opinion, to be the best performers of 2012. They included Cemex (CX), Freeport-McMoRan Copper & Gold (FCX), General Cable (BGC), Gol Linhas Aereas Inteligentes (GOL), and Potash of Saskatchewan (POT). The 2012 results for those picks were, respectively, +90.4%, -3.8%, +21.6%, -1.1%, and -0.1%. The average gain was 21.4%.
Adds and Drops for 2013
Now on to my adds and drops for 2013. The big question on the drop side is how long the current commodity price bust will last.
I don't think the decline in the price of everything from oil to iron ore to copper to fertilizer has put an end to the long-term trend in favor of these commodities. Demand will continue to rise, especially from developing economies, and it will continue to be harder and more expensive to add new supply.
But the current supply glut in many of these commodities isn't going to go away quickly. I think with many commodities, it's with us through 2013 and into 2014. The question then is what companies are strong enough in the short term to survive to the long term.
That's the background for my first two drops for 2013:
- Fortescue Metals Group (FSUMF), where the iron ore supply glut has caught the company with a very overextended balance sheet;
- Petrobras (PBR), where a drop in the price of oil has left the company with a huge discovery of very deepwater oil and a huge capital spending budget.
My other three drops are:
- Baidu (BIDU), because the company is stuck in a desktop PC search strategy when the world has gone mobile;
- Infosys (INFY), because the information technology outsourcing model, at least in India, has run into serious barriers;
- Nokia (NOK), because although I think the company can survive (and might even make you a buck or two in the short-run), I find it hard to see how it claws its way back to relevance in the smartphone market, or recovers anything like its former profit margins in the feature phone market.
And the adds?
- Cheniere Energy (LNG), because owning the first license to export liquefied natural gas from the United States is a hugely attractive way to exploit the US natural gas boom;
- Cummins (CMI), because the company's technology lead gives it growing market share in a diesel engine market driven by tighter emissions standards and the need for energy efficiency;
- eBay (EBAY), because PayPal has grown into one of the leading platforms for mobile payments;
- Middleby (MIDD), because its cooking systems offer restaurant operators a way out of the central problem in a world where everyone wants to eat out more but wants to pay less;
- Novo Nordisk (NVO), because diabetes is a growing global scourge.
As usual, I will have fuller write-ups in the next few days when I post my individual drops and adds for this portfolio.
Picking the potential best performers out of the existing portfolio is even tougher than usual this year. There are relatively few undervalued stocks on the list, thanks to the huge rally in the US market. And it doesn't look like we'll see big improvements in the economies of China, the United States, and the Eurozone in the second half of 2013. That said, my picks for 2013 are:
- Cemex, because although I don't expect a repeat of 2012's extraordinary returns on the company's balance sheet restructuring, I do expect better performance in cement sales in Mexico and the United States;
- Itau Unibanco (ITUB), because the Brazilian economy looks to be improving, and non-performing loans are falling at Brazil's second-largest bank;
- PepsiCo (PEP), because comparisons are easier this year than in 2012, because commodity costs are down and North American soda volumes look to be recovering, and because cost-cutting looks likely to deliver in 2013;
- Potash of Saskatchewan, because potash volumes are likely to pick up in the second half on higher demand from Asia and Latin America, and because the end of the Israeli Chemicals acquisition attempt is likely to bring a buyback and dividend increase this summer;
- Yamana Gold (AUY), because I think the already low-cost miner has a chance for dramatic cost improvements in a market worried about rising costs at mining companies.
Look for the usual sporadic updates on stocks in this portfolio over the rest of 2013.
