Cautiously, Optimistic is how I would like to describe my outlook for 2011. We have a lot of pros and cons going for us in our economic outlook. I will list these later in the article. Right now I wanted to highlight some of the sectors, themes, and stocks that my firm likes and why. I am so tired of talking about the jobless recovery and deficit spending issues that plague this country but that is still where we are and is still a problem even after the extension of the Bush Tax Cuts. We have a jobless recovery and some skepticism about spending on the part of all businesses not just small businesses. Certain states are faring better in the housing market but certain others like Nevada for instance are hemorrhaging with foreclosures, with this in mind banks continue to hold these on their balance sheets. That being said I am avoiding banks this year, even though there will be some good money made bottom fishing and strategically picking the right “too big to fail” institution. I do however own a position in (STD) Banco Santander one of the largest banks in Spain. They threw the baby out with the bathwater on this one since Spain is a member of the P.I.G.S. (Portugal, Italy, Greece, Spain) some of the hardest hit economic and housing markets in the world. Banco Santander continues to do business much of it outside of Spain and well across the developed European Union and the United States.
Hedge Your Portfolio-Eight Blue Chips to Inflation Proof Your portfolio Now
- Altria Group (MO): This $50 billion enterprise sells one of the most price inelastic products on the market. Cigarette input costs are a fraction of cost of goods sold for this company. Shares trade below $25 apiece and yield 5.96%.
- AstraZeneca PLC (AZN): This pharma giant is one of three highlighted in this article that are particularly immune to commodity inflation. Margins remained intact during high inflation quarters dating back to 1994. This $68 billion company trades at 48.84 and yields 5.22%.
- Bristol Myers Squibb (BMY): This other pharmaceutical behemoth demonstrates resilience in its margins through inflationary quarters dating back to 1976. Shares in this $43.8 billion company trade at 25.61 and yield 5.04%.
- Merck & Co., Inc. (MRK): Merck was the third most resilient, measured by average reduction in margins in inflationary quarters dating back to 1971. Shares in this $101 billion company trade at 32.79 and yield 4.64%.
- Kimberly-Clark Corporation (KMB): This maker of tissue and personal care products has expanded into healthcare over the years. The company has been able to drive earnings growth and maintain margins in inflationary quarters dating back to 1986. Shares of KMB trade for 64.96 and yield 4.06%.
- H.J. Heinz Company (HNZ): This consumables company relies heavily on its brand-name to outdistance peers in the generic products categories in which it competes. Heinz has successfully driven earnings growth and maintained margins during quarterly bouts of inflation dating back to 1985. Shares in this $15 billion company trade for 48.06 apiece and yield 3.68%.
- Sysco Corporation (SYY): The global marketer and distributor of food service products wrings every penny out of its unmatched distribution and automation network to pick up transportation and input cost efficiencies. The company has successfully navigated inflationary quarters dating back to 1987. Shares trade at 28.25 and yield 3.58%.
- Lockheed Martin Corporation (LMT): This major player in defense relies on intellectual property and its capable personnel to drive earnings, insulating it from increases in input costs. Lockheed has maintained margins through inflationary periods dating back to 1977. Shares trade at 81.48 apiece and yield 3.54%.
The Dividend Players: Top Stocks that pay great dividends for your portfolio:
The research firm Morningstar assembled a list of 29 such companies. Nearly half are utilities such as Exelon ( EXC ), Dominion Resources ( DOM ) and Consolidated Edison ( ED ), the sort typically associated with high dividends. The rest read like a Who’s Who of corporate America, with top-notch representatives of a wide variety of industries, including health care – Abbott Laboratories ( ABT ), Johnson & Johnson ( JNJ ), Merck ( MRK ) – consumer staples – Clorox ( CLX ), Kimberly-Clark ( KMB ), Philip Morris International ( PM ) – energy – Chevron ( CVX ) and Conoco Phillips ( COP ) – and telecommunications – AT&T ( T ) and Verizon ( VZ ).
(KMP) Kinder Morgan and (BPL) Buckeye Partners,and lastly (MO) Philip Morris. These should be used to compliment your growth stock positions only. After all what difference does a 6%-7% dividend make if value/dividend stocks go down in principal because growth cycles into favor. You need both growth and value in your portfolio.
Other Growth Stocks to consider are; but again buy on dips.
(AAPL) Apple Computer,(BP) British Petroleum, (DOW) Dow Chemical, (AMT) American Tower , (UTX) United Technologies. (BBL) and (BHP) BHP Billiton
According to the EIA, (The U.S. Energy Information Administration) “The projected decline in production in 2011 and increase in natural gas consumption in 2012 contribute to a strengthening of natural gas prices late in this year and next. As natural gas prices begin to rise, forecast production rebounds in 2012, growing by 2.2 percent. ” Therefore, because of the dividends paid we are long KMP (Kinder Morgan Partners) and BPL (Buckeye Partners)
Kinder Morgan is one of the largest pipeline transportation and energy storage companies in North America with approximately 37,000 miles of pipelines. They transport, store and handle energy products like natural gas, refined petroleum products, crude oil, ethanol, coal and carbon dioxide (CO2). These products are essential for generating electricity, heating homes, powering cars and much more.
Almost all of our assets are owned by Kinder Morgan Energy Partners the largest publicly traded pipeline master limited partnership with a value of more than $30 billion dollars. The current yield on the stock is 6.14% as of 01/18/2011
Buckeye Partners, L.P. is a publicly traded partnership (BPL) that owns and operates one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, with approximately 5,400 miles of pipeline. The yield on this stock is 5.69%, as of 01/18/2011
We like (DOW) Dow Chemical and many of the other chemical companies that have been beaten up most recently in 2009.
While we are a little nervous that gold has had its day in the sun and is getting a little toppy, we do still like a small portion of a commodity play in a clients portfolio. We like the Permanent Portfolio (PRPFX), we like BHP Billiton both the British version of the company and the largest minor in Australia. (BHP) and (BBL).
Drugs, Healthcare, and Big Parma; Buy Big Pharma on Dips
In this area of the market we continue to like (AZN) Astra Zeneca, (ABT) Abbot Labs and (JNJ) Johnson and Johnson for their consistent pipelines of drugs and commitment to R&D. The major risk to this arena is universal healthcare, pressure on margins primarily from Medicare/medicate one of the largest purchasers of drugs in the nation placing downward pricing pressures on the margins by asking for substantial discounts, drugs falling off of patent, not enough new drugs in the pipeline, a failure to commit to R&D due to costs and outsourcing drug productions to emerging markets where costs are a fraction of manufacturing them here in the US and the Government regulation is a lot less invasive.
We are shortening duration and maturity and adding inflation adjusted hedges to our fixed income portfolio. We are also underweighting fixed income 5%-10% in client’s portfolios and adding an overweight to US Large Cap Equities that pay a great dividend instead. The fear of interest rates rising is still looming in our minds and is a constant headache to us. We are neither in the Inflation camp or the deflation camp but want to be cautious in the fixed income arena in 2011. We feel like this is the year of the equity vs. the debt instrument and are much more optimistic about equity selection. (TBT) will go double short the long 20yr treasury. We would use this fixed income short to stave off inflation and as a hedge to your portfolio.
Round out your asset classes and diversify yourself by using good quality mutual funds. Here are the ones we like right now.
Mutual Fund Additions include:
(PRWCX) T. Rowe Price Capital Appreciation Fund This should be a core component, Asset Allocation type fund to your portfolio.
(PRPFX) The Permanent Portfolio- I have used this for years. It is categorized as a conservative allocation fund but this is really part of your commodity mix. You are simply buying hard, real assets here in this fund. It has had both a short and long term track record that is consistently good.
(PRBLX) Parnasus Equity Income- Large cap growth and income to gain diversification to your portfolio.
(UMBWX)-Core International Equity Fund
(DREGX)-Core Emerging Market fund for 10-15% of your international allocation depending on how aggressive you want to be.
(LISOX) Lazard International Strategic Equity- Both emerging and non emerging foreign stocks.
(JMCVX) Perkins Mid-Cap Value (here is your mid small cap piece).
(NESGX)-Needham Small Cap fund
For those of you that hate, hate, hate mutual funds we can simply use the ETF’s (Exchange Traded Funds) or SMA’s (Separately Managed Accounts) to fill in the diversification gaps, in international, small cap, emerging market, commodity, and short term bonds.
We have a jobless recovery, a terrible housing market, the lack of confidence both in the corporate and retail worlds. We have a huge deficit that will take a lot of discipline to get under control. If we don’t do this our great nation will become like Greece or Ireland. Asia, and specifically China is gateway for growth in 2011, we think the appetite for commodities in the emerging markets is still there and we feel like fuel consumption is still there. Remember America is a great nation, our dollar is strong, and we don’t have all the in cohesiveness of the Euro zone. We have a lot to look forward to in 2011.