Focusing on a long-term strategy

• Sell entire position in Vanguard Emerging Markets ETF (VWO, news, msgs) at market open.

• Buy shares in Covance (CVD, news, msgs) with proceeds from sale of VWO.

We're only a couple of weeks into this six-month contest and my current portfolio has me trailing the pack -- but it's still early, and the race is still pretty tight.

So far I think my strategy is working relatively well, even though my ETF holdings are in the red. I am not ashamed to admit that when it comes to predicting short-term overall market movements, I haven't a clue. Therefore, staying fully invested and exposing as much of my portfolio as possible to the market's long-term upward trend is the way to go.

I'm also pleased that, as of this writing, the one individual stock pick I did make, Lufkin Industries (LUFK, news, msgs), is my best-performing position. Though the whims of the market can change this in a heartbeat, I strongly believe in Lufkin's long-term prospects. Whether those prospects will be realized within this round of Strategy Lab is anyone's guess.

I'm selling my entire position in Vanguard Emerging Markets ETF (VWO, news, msgs) for two reasons.

First, I need the money to purchase shares of another individual stock I'm adding to my portfolio this week. Second, I'll be honest, investing in the Vanguard ETF in the first place was a mistake. I'm not saying this because it's my worst-performing position. I am saying this because international investing, especially with regard to emerging markets, is outside my area of expertise. I added the position simply to gain diversification and international exposure -- not because I believed that emerging markets were, on the whole, undervalued when compared to U.S. stocks -- and that was my mistake. Emerging markets may well be undervalued on the whole, but I'm in no position to know one way or the other.

I'm using the proceeds from this sale to purchase shares in Covance (CVD, news, msgs).

Investing in suppliers, not developers

Those of you who were at The World Money Show in Orlando heard Ken Kam, when discussing his selection of Elan (ELN, news, msgs), talk about how he didn't believe most investors should expose themselves to the science risk when investing in pharmaceutical companies. That is, that investors should wait to invest until the company's chief prospects are further along in the clinical-trials process. I believe it was Kelly Wright who mentioned that one way to accomplish this was to invest in companies that supply the drug developers, thereby achieving the benefits of an overall uptrend in the industry without exposing oneself to the risk that any one individual drug prospect may fail.

So I decided to scout around CAPS a bit to see if I could find a company that accomplished those goals, and I think I have found an excellent prospect in Covance.

The CAPS pedigree for Covance is impressive. As of this writing, 187 CAPS players have predicted Covance will outperform the market, with zero predicting it will underperform. One-third of these outperform calls are coming from CAPS All-Stars (players whose track record places them in the top 20% of all CAPS players).

• CAPS: Investors team up, rate stocks, beat the market

A quick glance at a few key statistics for Covance reveals some of the reasons behind this universally bullish CAPS sentiment. According to the stats on MSN Money, the company's 12-month revenue-growth rate clocks in at 16%, with earnings growth at an even more impressive 32.9%. Couple this with a reasonable valuation given the recent earnings-growth rate (forward P/E of 26.4) and a pristine balance sheet (about $220 million in cash and zero debt), and it's not difficult for me to see why Covance enjoys the highest rating, 5 stars, in CAPS.

Perhaps fellow CAPS player "Cradsportflo" sums up the bullish argument best:

"Great company growing quickly at a time when health care for baby boomers is a huge market. This company will see more and more business as pharma, both big and small, continues to test drugs in the pipeline. I also like this play as a safe way to bet in drug development, as Covance's bottom line isn't affected when a drug fails tests."

So there you have it.

I'll continue to sell off portions of my ETF holdings and purchase stock in individual companies as time progresses (my goal is 10 to 15 individual stock holdings), but if you're looking for a way to gain some exposure in your portfolio to the overall long-term trend in the pharmaceutical industry -- without having to take on the risk and volatility associated with the results of individual clinical trials -- Covance may be well worth considering.