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How We See It

Neil George
Neil George
Neil George.com
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We've got another year behind us; and as we're now fully engaged in 2006, here's how we'll work our Portfolios for the next 12 months.

One of the biggest mistakes investors make is not forgetting history.

You see, when it comes to investing, it's not what happened to a stock or bond that counts. It's what a stock or bond will do for you going forward.

If there's one discipline we want to instill in our subscribers, it's to take the time to go through each and every stock, bond or fund and ask the question: Is this the best place for my money right now?

This is what we do as we put together each issue of Personal Finance. Every two weeks we go down the list of recommendations inside our model portfolios and put each of them through two simple tests.

First, we look at each investment and ask if we'd buy it all over again.

If we're sitting with a huge gain but can't explain why and how that stock will make us more money moving forward, it's time to sell it and put the cash into better prospects.

Second, we don't hold and hope. If we're down on a stock, holding and hoping is just going to make it worse.

Either the stock will keep heading south or, at best, the stock will just sit there doing nothing. We'll sell the sucker if we can't honestly say it's going to be the best stock possible for our Portfolio going forward.

If we're not finished with our full investigation before our publishing deadlines, then the stock goes on watch until we come to our final call to either keep buying more or sell.


From Whence We Came

Getting all of us to look forward is a great concept but one that demands some credibility to make it work. Credibility is only earned from a solid foundation of past successes.

This is why at the beginning of each quarter and at the beginning of the year, we post our cumulative returns for all our holdings.

In 2005 and the fourth quarter, the US stock and bond markets didn't do much. The S&P 500 index gained around 3.8 percent and, including minor dividends, the total return for the general US index was 5.7 percent. And while other major market indexes around the world did better more or less, only a few were outstanding.

For bonds, the changes--led generally by the US market--have been on the short-term side of the yield curve, climbing modestly by around 100 basis points or 1 percent.

At the same time, intermediate- and long-term rates were stable to lower, particularly in newer members of the big bond market that were seeing improving credit ratings.

This means that bond investors in the core US market made a modest overall return of just under 1 percent--0.6 percent for the US intermediate- and long-term bond index. Investors with greater reach beyond the US government paper fared a bit better.

The Growth Portfolio averaged 14.9 percent for the year while our Income Portfolio trounced the core bond market with a straight average total return of 2.7 percent (excluding cash).


The Future Is Ours

We've got our cred, so here are our calls for the next year.

We have to start with the lay of the land--the economy. For 2006, we're looking for pretty much what we had in the past few years.

The US economy has been poking along at a steady pace. This means you can expect everyone from the corner grocer to the big CEO to work together to bolster growth by 3 percent or more.

That's not a lot to expect, but we've been able to do it despite huge challenges, from tragic natural catastrophes to spikes in energy prices.

Inflation, the cancer for any portfolio, should remain calm with the core staying in the 2 percent range. Of course, none of us buy the whole basket of goods and services inside the Consumer Price Index (CPI).

Some parts, from medical care to energy, will cost more. But really, with lots of competition and lots of excess labor around the world, don't expect much trouble from inflation.

Just like in our PF Portfolios, we start out with how our bonds will fare. While the general US Treasurys aren't setting the markets on fire, that's just a starting point for us.

The key is that bonds are just like stocks. The market indexes might say bear--but plenty of individual bond plays have and will continue to pile on the profits.

Bonds aren't just bets against the economy or the stock market. They're investment bets on the success of companies and countries.

The key is to look at bonds with good yields and great prospects for attracting investors as well as those with improving credibility and the right maturity range. That means staying in the middle of maturities while taking advantage of good quality bonds.

The best and easiest means has continued to be a few select closed-end bond funds, including Growth Portfolio member Scudder Multi-Market Income Trust (NYSE: KMM).

The fund trades on the NYSE like a stock and has a solid collection of bonds generating hefty monthly dividends for a near 8 percent yield and a total return--even the supposedly bad bond years during the last five years--exceeding 75 percent. Buy Scudder Multi-Market Income under 11.

But bonds are just the foundation to build a solid stock portfolio on. We love bond funds but we also have a pile of stocks that also hold our ardor.

While most market letter editors use the cusp of the new year to predict where the S&P or Dow will end the year, we really don't care.

These indexes are just proxies for a handful of otherwise-challenged companies that will really do very little for most of us. And if they do, great. But we're not betting your money and ours on it.

Long-term growth investors go with companies, not stock picks. And for us, there are plenty that not only are in the right industries but also remain focused on shareholders more than top management.

Starting with the 2005 Subject of the Year, petrol, some did well. Even a usual suspect ExxonMobil gained around 16 percent. But there are plenty of better choices.

A prime example is one of our Canadian petrols, Enerplus Resources (NYSE: ERF). The company generated a return of 51 percent for the year and 523 percent for the past five years, including the years before the big price surge in natural gas and crude.

And we see it continuing because Enerplus doesn't need high crude prices to be profitable. In fact, all it takes is for crude to be in the $20 a barrel range and natural gas to be in the $2 range, hardly a high bar to pass.

And if petrol goes higher, all the better. Buy Enerplus--and its Growth and Income Portfolio peers--with its near 9 percent dividend, up to 50.

We can also make money on other stuff that comes out of the ground. We simply need to look past the hype of those markets to see better demand and supply conditions.

Ag products are a prime example. It's not the old-line crops, but the newer pest, weed and weather-resistant products that are expanding at a rapid rate on every continent.

From consumption to bio-fuels, two of our companies are leading the way. Archer Daniels Midland (NYSE: ADM) and Monsanto (NYSE: MON) are engineering the new profitable crops and processing and selling them to an increasingly accepting world. Both have fared well over the past five years with returns exceeding 104 and 184 percent, respectively.

Yet they've done it with little fanfare from the pundits. Buy a few shares of ADM up to 26 and Monsanto up to 80.

Last, one of our ineluctable maxims is: Our companies treat us as the boss. That means getting paid throughout the year.

In bad markets and good ones, no one ever did poorly by piling up the cash thrown off by dividends, especially in a low-growth economy.

From our bond, petrol and ag recommendations here to all the others, we always make sure that we're getting paid along the way.

One collection of companies that epitomizes this is a new security-- Income Deposit Security (IDS)--that's hit the American Stock Exchange. Our recommended four are cash-heavy, straightforward companies that will keep paying us whether the market is up, down or somewhere in between.

Take a look at laundromat company Coinmach (AMEX: DRY); phone company Otelco (AMEX: OTT); processed food company B&G Foods (AMEX: BGF); and concession stand operator for sports and convention centers around the country Centerplate (AMEX: CVP).

All are simple defensive companies paying dividends of 10 to 14 percent and should be bought at up to our buy targets in the Growth Portfolio table (p. 7).

Neil George will be available to take your questions until Monday, February 6. Please use the form below to submit your questions.

 
 
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