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10 long-term picks in a short-term market

posted on May 3, 2013 at 8:30 am
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10 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 10 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 (powells.com.)) Since January 2009 I’ve run a portfolio built on this system on http://jubakpicks.com/jubak-picks-50/ . Every year I’ve done an annual update, buying 5 new stocks and selling 5 old picks out of the 50 stock portfolio.

The update for 2013 is a little late this year—May 3—but in this post you’ll find the usual annual five buys and five sells.

And you’ll find something a little different too—a continuation and extension of a list 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 existing portfolio that I thought would perform best in 2012. In essence I created a 10 long-term buys for the 2012 year list out of the larger 50 stock long-term portfolio.

In this post you’ll find my 10-long terms buys—five new buys and five picks from the existing portfolio—for 2013.

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, since January 1, 2009, 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 return on the Standard & Poor’s 500 of 72.3%. 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 to create and track a 10 long-term picks of the year portfolio in January 2012 from the larger portfolio. Since the beginning of the Jubak’s Picks 50 I’d been advocating that investors should buy and sell upon occasion inside that larger portfolio depending on market conditions. But I hadn’t given any specific picks to accomplish that.

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 sure 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 10 long-term picks for 2013.

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 these days of extreme stock market volatility. The premise of my 2008 book was that by picking trends with long life spans—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 with a very big tweak. I’d sell no more than 10% of the portfolio (5 stocks) and buy no more than 10% (5 stocks) of the portfolio. For more detail on how the portfolio is built you can see last year’s post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ 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 from the existing portfolio, in my opinion, 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%.

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; and Petrobras (PBR), where a drop in the price of oil has left the company with a huge discovery of very deep water oil and a huge capital spending budget.

My other three drops are Baidu (BIDU), because the company is stuck in a desk-top 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; and 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 U.S. natural gas boom; Cummins (CMI), because of the company’s technology lead gives it growing market share in an 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; and 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 for 2013 out of the existing portfolio is even tougher than usual this year. There are relatively few undervalued stocks on the list—unlike CEMEX last year—thanks to the huge rally in the U.S. 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 (CX), 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 (POT), 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; and, finally, 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares Cheniere Energy, eBay, Home Inns and Hotels Management, Lynas, Novo Nordisk, and Yamana Gold as of the end of March. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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