Four offerings deemed to be right for right now.
Exchange-Traded Fund: Utilities Select Sector SPDR
Bill Gross is tired of earning 0.1% on his money market funds, and you should be, too. In his December 2009 Investment Outlook, he stated his case for equitizing cash by buying utility stocks in today's market environment. We agree, and we picked up a stake in the sector in our ETFInvestor newsletter's portfolio at the end of October. Utilities Select Sector SPDR
In an industry plagued by stagnant growth, Novartis emerges as a juggernaut with diversified operating platforms and an industry-leading number of new potential blockbuster drugs. Strong intellectual property supporting multibillion-dollar products combined with a plethora of late pipeline products create a wide economic moat for the firm. Further, with the patent losses of hypertension drug Lotrel, fungal medicine Lamisil, and epilepsy treatment Trileptal in the rearview mirror, the company is poised for robust near-term growth.
Novartis derives its strength from a diversified operating platform that includes branded pharmaceuticals, generics, vaccines, diagnostics, and consumer products. Although the majority of Novartis' competitors focus solely on the high-margin branded pharmaceutical segment, Novartis runs four complementary operations that reduce overall volatility and create cross-segment synergies. For example, not only does its generic business, Sandoz, serve to grab a portion of the billions of dollars in competitive branded products losing patent protection during the next 10 years, but it also extends the lifecycle of in-house products as patents expire. Also, the vaccine division (largely created by the 2006 acquisition of Chiron) offers the company a substantial footprint in an area where pricing power is increasing with innovative vaccines and fewer competitors. Further, the company's intentions to acquire a majority share of Alcon ACL should greatly boost its consumer business with additional sales from the fast-growing eye-care business. (Haywood Kelly)
Mutual Fund: Sequoia
The story at Sequoia is as straightforward as they come. The fund has posted great risk-adjusted returns since its 1970 inception by steadfastly applying the same Buffett-inspired strategy. Bob Goldfarb has been on the fund since 1971, and he and David Poppe lead a team focused on high-quality firms with enduring competitive advantages and strong finances. Nearly all the portfolio's firms have earned economic moats from Morningstar's equity analysts and half have wide moats, indicating they're the steadiest, most defensible businesses. In contrast, just 20% of the S&P 500 Index's names have wide moats and nearly a third lack moats. And this portfolio's debt/capital ratio has always been much lower than the benchmark's. Sequoia's collection of topnotch, low-debt firms behaves exactly as expected. It performs well in most up markets and holds up much better than most in big downdrafts. It puts up solid absolute gains but lags racier rivals in years where speculative fare does best, such as 2003 and 2009, when the fund was up nearly 20% but lagged most of its peers. But as 2008's downdraft showed: The time to buy the insurance a quality portfolio provides is before you need it. (Michael Breen)
Separate Account: Perkins Mid Cap Value MA (Retail)
This separate account has been a consistent, long-term winner. Managers Tom Perkins and Jeff Kautz are contrarians who've excelled at finding successful turnaround plays. They aren't cigar-butt investors. They favor firms with solid finances and managers with proven records of capital allocation that have hit near-term issues, depressing their share prices.
Lately they've been picking through the rubble of the financial sector. Unlike many peers, they've passed on the big banks, instead buying insurers they think have the best balance sheets, such as Allstate ALL and Everest Re RE. Both firms are market leaders that trade at a P/E of just 7.5. The duo has also added value over the years with its sell discipline, locking in gains in overheated sectors before things head south. In 2007 the team took money off the table in a number of hot-performing agriculture stocks and REITs well before those sectors stumbled.
This separate account's strategy won't win out every year, but its manager's disciplined approach and stock-picking acumen continues to impress. (Michael Breen)
Hindsight: Fall 2008 à la Carte
We hit the mark with our Fall 2008 picks. The lone clunker was tax-preparer Jackson Hewitt