Streetwise for Sunday, January 7, 2018
It is time for my list of 12. Before delving into my proposals for the 2018 list, letís summarize the companies that were selected and discussed in my January 8, 2017 column.
The first two selections were General Dynamics (GD) and Goldman Sachs (GS). The former was selected to take advantage of increased military spending that is a key part of Republican platform, and Goldman because it is the wiliest firm on Wall Street and will gain famously from Trumpís agenda.
Next were four from the previous year, Apple (AAPL), 3M (MMM), Sherwin-Williams (SHW) and Hasbro (HAS). To take advantage of infrastructure spending, I stayed with Illinois Tool Works (ITW) and Caterpillar (CAT). I also felt John Deere (DE) continued to merit attention.
In addition, I added Microsoft (MSFT) and Johnson & Johnson (JNJ) with its AAA credit rating. Finally, to cover the financial arena, I went with Bank of New York Mellon(BK)and its potential gain from the inevitable increase in interest rates.
Performance was determined via Morningstar software. A hypothetical $10,000 was invested in each stock at the start of January 2017, with dividends being reinvested monthly. The benchmark used was the S&P 500 total return index, which also incorporates dividend reinvestment. The analysis goes through December 31, 2017.
So, what were the results? The 12-Stock portfolio produced a return of 36.18 percent, as compared to the S&P 500 return of 21.83 percent. Now, it is well known that 2017 was a good year for Wall Street, which of course aided the 12-Stock portfolio. Nonetheless, here are some key points to consider.
First, an all equity portfolio of large cap stocks that continually raised dividends dramatically increases your chances of investment success. And there was no buying or selling during the year, despite the monthly returns for the portfolio varying from a high of 6.12 percent in February to a low of 0.78 percent in July. The price-to-earnings (P/E) for the portfolio was 23.72, as compared to 22.74 for the S&P 500. Personally, I view a single P/E number as meaningless.
The top performing stock was Caterpillar with a gain of 75 percent. The worst performer was Goldman Sachs with a gain of only 7.74 percent. The companies were all large capitalization (share price multiplied by shares outstanding) companies and were split evenly between growth and value as defined by Morning Star.
Finally, there was no rocket science or higher mathematics employed in the selection process. Every company is practically a household name. No international, emerging markets, or high-tech start-ups. Just a portfolio that anyone with a modicum of investment experience could build utilizing a discount brokerage account.
Unfortunately, everything discussed so far is ancient history, although you could continue to hold those same stocks for another year and probably produce an above average return at the end of 2018. Or you could listen to the prognosticators of doom, who continually point out that the markets are going to ìcorrect,î although they never say when, why or by how much (convenient). Or you could investigate the 12-Stock portfolio for 2018.
So, what are my research recommendations for this year? The defense industry is going to play a major role in 2018, so I will keep General Dynamics (GD) and add Lockheed Martin (LMT) and Boeing (BA). Johnson & Johnson (JNJ) with its triple A credit rating is always a good candidate and I will add in Intuitive Surgical (ISRG). The company manufactures the da Vinci robotic surgical system. Another new candidate is Praxair (PX), a manufacturer of industrial gases.
From a technology perspective, I am keeping Apple (APPL) and Microsoft (MSFT), and adding STMicrolectronics (STM). For industrial goods letís go with United Technologies (UTX) and keep Bank of New York Mellon (BK). The 12th company is Take-Two Interactive Software (TTWO.
Please keep in mind that the 12-Stock portfolio is not designed for you to simply add water and stir. Rather, it should be a catalyst to stimulate your own research efforts.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.