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Today I'm going to give you a list of four turkeys and five bargains from my buy-and-hold portfolio, the 50 Best Stocks in the World, and in the process, I'll explain my criteria for selecting them.
For those of you who came in late, I started that portfolio in September 1998. The theory behind the 50 Best is pretty simple. The goal, as I put it then, was to compile a list of stocks that truly deserved the often too easily bestowed moniker of blue chip. To make the list, a stock had to have:
- Truly outstanding opportunities for global growth over the next five or 10 years.
- A competitive edge that would allow the company to seize the lion's share of that global opportunity.
Notice there's nothing in that formula that accounts for the ebbs and flows of a sector's popularity or in the market's fortunes as a whole. When I pick the 50 best stocks each year and decide which stocks to drop, I'm not looking at sector momentum or trying to guess the direction of economic trends over the next year or five years.
I revise the portfolio only once a year, on or near the Sept. 20 anniversary date, and even then I limit changes to a turnover of just 10%. No more than five stocks can drop off the list, to be replaced by other stocks, in any one year.
Not bad for a 9-year run
Between the annual updates, I try to issue quarterly reports, flagging with a "buy" rating any long-term holding that has been trading at a very attractive temporary price. I haven't been especially good at meeting that quarterly schedule. In fact, it's been 10 months since I've done one.So how has this portfolio done? It's fulfilled its original purpose very well by giving long-term buy-and-hold investors a gain that beat the major market indexes with safety and low turnover. In the portfolio's first nine years -- September 1998 through September 2007 -- it gained 70.96%. The table shows how it compared with the Standard & Poor's 500 Index ($INX) and the Nasdaq Composite Index ($COMPX) in its first nine years and in the current year, which is not quite complete.
| Sept. 1998 to Sept. 2007 | Sept. 2007 to date | |
|---|---|---|
70.96% | -14.61% | |
Standard & Poor's 500 Index ($INX) | 49.12% | -16.50% |
Nasdaq Composite Index ($COMPX) | 59.74% | -12.83% |
I'm not going to make any changes to the portfolio today. Remember, I change the membership only around the anniversary date.
But knowing what we do now, I'd put four stocks on the list of the fundamentally damaged. The competitive position of these companies has eroded enough that I don't think they make the grade any longer. The chances are good that I'll drop them from the list in September.
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My fifth drop is likely to be Genentech (DNA, news, msgs). The company has received an acquisition offer from Roche Holding (RHHBY, news, msgs). I believe that deal will go through, although at a higher price than Roche initially offered.
My four fundamentally damaged stocks are:
- Citigroup (C, news, msgs). This was once the greatest consumer banking franchise in the world. In retrospect, it's clear the bank lost its way during the drive to become a financial supermarket, offering banking, insurance, brokerage and investment banking services all under one roof. At the moment, I don't see any evidence that the bank appreciates what it has lost.
- Boeing (BA, news, msgs). The company just can't seem to get a product to market on schedule. This time around, the delays on the 787 Dreamliner are going to be really, really expensive, as every day that goes by leads to more delays and cancellations of orders from strapped airlines. The aircraft market is getting a lot more competitive, too, with the entry of China and Russia -- still years from being competitive -- and new products that take Canada's Bombardier (BDRBF, news, msgs) and Brazil's Embraer (ERJ, news, msgs) further into the market now dominated by Boeing and Europe's Airbus.
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- Nvidia (NVDA, news, msgs). In the graphics market, Nvidia faces increasing competition from Advanced Micro Devices (AMD, news, msgs) and Intel (INTC, news, msgs). It's the competition from Intel that worries me most in the long term. Intel is packing more graphics-processing power into its chips and chip sets. That pushes down the average selling price for graphics processors as a whole and, more importantly, forces Nvidia to go up-market with its chips. Nvidia's chips still offer more graphics punch for serious game playing and other graphics-heavy uses, but it's never good to be in a market where a competitor with lower manufacturing costs is eating away at your share from the bottom.
- Valero Energy (VLO, news, msgs). It's tough to be a refiner these days. Because it costs so much to buy the oil you run through your refinery, profits are getting squeezed. But I think there's a bigger long-term danger looming on the horizon for refiners outside the major oil-exporting countries. Oil producers such as Saudi Arabia are moving downstream to capture more of the revenue as oil moves from underground to auto engines. They're building refineries of their own, right next to guaranteed supplies of oil from their national oil industries. The number of refineries being built now in the Middle East argues for falling margins in the refinery sector as a whole as competition heats up.
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