10 stocks for the next 10 years: It's time for my annual update to the Jubak Picks 50 long-term portfolio

01/18/2011 8:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

So far, this pick 10 stocks for the next ten years thing is a piece of cake.

All you have to do, after all, is start your picks in the bottom of a bear market but close to a recovery and then ride out the next ten-year bull market, right?

That was good enough for a 57.8% gain in my Jubak Picks 50 long-term portfolio in 2009, which I launched on December 30 2008. You’ll remember that the stock market bottomed in March 2009.

And for a 20.1 gain in 2010. (Just for comparison, the Standard & Poor’s 500 gained 26.5% in 2009 and 15.01% in 2010.)

The two-year gain on that long-term portfolio of 89.5% compares to a 45.6% gain for the Standard & Poor’s 500.

Just two little potential glitches that I can see. (Really, really, really small.) First, as anybody who invested through the bear markets that began in 2000 and then again in 2007 knows from first hand experience, you just can’t count on getting a 10-year bull market when you need one. Comes along a year like 2008 and quicker than you can say “Hank Paulson” the S%P 500 is down 37%. That’s enough to take the gloss off any long-term portfolio.

Second, even when the stock market as a whole cooperates, sometimes even good companies go bad before those 10 years have run out. Monsanto (MON), once the undisputed star among seed companies, was down 13.5% in 2010 and any investor now has to wonder when the company might get its mojo back.

It’s those two glitches that inform the strategy for the Jubak Picks 50 (http://jubakpicks.com//) that I started in December 2008. This long-term portfolio does indeed look for stocks that you might well profitably hold for 10 years or more, but it recognizes that markets and companies change. And that you might need to tweak even the best long-term portfolio once a year or so.

As I wrote when I reported on this portfolio a year ago, Buy and hold isn’t dead, but its DNA sure could use a bit of genetic engineering.

Buy and hold was never supposed to be buy and forget, but a great bull market run like the one that stretched from 1982 to 2000 made it seem like all an investor had to do was buy and then remember to add up the profits from time to time.

The bear markets that began in 2000 and 2007 have demonstrated exactly how dangerous buy and forget could be. In the first bear, from March 2000 through October 2002 the Standard & Poor’s 500 fell 47%. In the second bear, the one that began in October 2007 and that bottomed in March 2009, the S&P 500 lost 56%.

The experience of those two bear markets has left many investors reluctant to buy stocks at all—and it’s left most of those willing to buy stocks as skittish as whitetail deer in hunting season: Never able to relax and always ready to bolt for escape. The flow of money out of equities, as measured by the flows in and out of stock mutual funds, didn’t reverse until the fall of 2010.

But the original advantages of long-term investing aren’t extinct. Long-term investors can still take advantage of temporary panics and mis-pricings to build positions at low costs. They can still put time to work for them by buying the stocks of companies with a high return on invested capital and letting those companies compound those returns over the years. They can still catch long-term trends that can power a company’s stock for years without being sidelined by worries about catching the best price.

All that buy and hold needs is a transformation from buy and forget to buy and review. Even a review as infrequently as annually will do the trick, I believe.

So each year at the beginning of the new year I pick 5 stocks to drop from the portfolio because these companies haven’t run their business in the way that I want from a long-term portfolio holding. I replace those five companies with the shares of five companies that I do think demonstrate what it takes to be a stock for the next ten years.

In these buys and sells I’m not trying to reinvent the wheel. I’m using the rules developed by long- term investors over the years—and that have worked so well over the years.

The buying rules involve looking for companies with

  • A lasting competitive edge. Morningstar.com calls this edge a “wide moat.” Peter Lynch famously advised looking for businesses that even an idiot could run because one day an idiot will. Other long-term investors such as Warren Buffett look for companies that have built up the value of a brand name that assures their continued dominance in a market.

  • a return on invested capital that’s higher than that at competitors. This is insurance since it means that a company will have lots of profits to reinvest (at a higher than average rate of return) in staying one step or more ahead of competitors

  • a history of research and development (or acquisition and development) that demonstrates that this is a company that doesn’t fall asleep at the switch, that knows how to press its advantage over competitors, and that can manage the change that sweeps through all parts of the global economy with increasing power these days.

  • a conservative management style that can balance risk—since companies don’t survive for the long term unless they take risk—with safety. Things can still go wrong at companies like these but conservative management avoids bet-the-company gambles. an ability to recognize long-term global economic trends and to ride them even at the cost of disrupting the company’s existing business.

And the simple selling rules include

  • Sell when the reason you bought the company in the first place no longer applies. Sell when the long-term trend that the company is riding turns in a direction the company didn’t expect or dissipates entirely. No use investing in even the world’s best buggy whip company when cars are replacing horses Sell when the larger macro picture—for a market or for an economy as a whole—heads south. No use investing in cars, even if they are replacing horses, if a financial panic makes it impossible for customers to get a loan to buy a horseless carriage.

At the same time as I pick five stocks to add and five to drop, I name five more than I think are especially appropriate now—that is in 2011—for any portfolio, buy-and-hold, buy-and-review, whatever.

The result is ten stocks for the next ten years. (To see the Entire list of my 50 picks for the long-term see http://jubakpicks.com//.  For more on the broad themes that have guided these picks see my 2008 book The Jubak Picks. You’ll see an ad and an easy way to order from my blog The Jubak Picks http://jubakpicks.com/ )

So what companies get the ax as we start 2011?

Ctrp.Com (CTRP). I added this Chinese Internet travel company to the Jubak Picks 50 in January 2010. And it was a big mistake. I missed major changes in China’s travel market that were making Ctrip.Com’s huge market share less valuable. Travel companies were cutting the fees that they paid to Ctrip and its competitors so while Ctrip was still growing, that growth wasn’t as profitable as expected. Even in long-term investing, it’s good to admit a true mistake early. And that’s what this was. The pick gained 12.6% in 2010.

Embraer-Empresa (ERJ). This Brazilian maker of regional and business jets had a great year—the tock was up 36.4% in 2010—but the aircraft market is shifting under the company’s feet. And faster than I’d had expected. China is determined to build a domestic aircraft industry and it’s making fast progress. The Commercial Aircraft Corp of China now has 100 orders for its single-aisle C919 passenger jets. (Although as Airbus and Boeing know taking the orders is the easy part; it’s delivering planes that’s hard.) The C919 is more of a threat to Boeing and Airbus granted but I don’t want to be in the path of a government-supported Chinese aircraft industry, thank you.

Jacobs Engineering (JEC). Recessions, especially great, big, global recessions, test companies and investors get to see which companies handled the bad times best. I don’t think that Jacobs Engineering did a bad job during the recession: The company, in fact, did a good job of holding onto core client. I just think some other infrastructure engineering companies did a better job at adapting to the post-recession world while the world was still in a recession. Think of this sell of Jacobs Engineering as a decision to upgrade. The stock was up 21.9% in 2010.

State Street (STT). State Street’s involvement in the global financial crisis didn’t do the company any good and it’s taken the company longer than I expected to get momentum back. That’s what happens when you so thoroughly mis-managed your own balance sheet—clients looking for somebody to manage their money think twice. This is still an amazing asset gathering machine—with $20 trillion of assets under customer and $1.9 trillion of assets under management-- but I think the asset management and custody business will get increasingly competitive as more big financial services companies recover and more competition always cuts into fees.

Suntech Power (STP). 2010 was just a terrible year for solar power companies as economic and financial crises in the United States and, more importantly, in Europe cut into government subsidies for solar power. The winner in a solar power game where capital is the key is Chinese solar companies. At one point, I thought Suntech was about to step out in front of the Chinese industry on its technology and manufacturing. I now think there are better picks in China. This stock was down 45.8% in 2010.

And now for the fun part. Putting together my 2011 list of 10 stocks for 10 years.

Here are the five long-term picks already on the list that I think will do best in 2011:

Bunge (BG), the big global buyer, seller, storer, transporter, and processor of soy bean and other oil seeds, is a stock to own in a year that’s shaping up to repeat the food price spike of 2008.

Cemex (CX) will see what was a handicap in 2010—the Mexican company’s exposure to the moribund U.S. construction sector—turn into an advantage. For once, Porfirio Diaz’s lament, Poor Mexico—so far from God, so close to the United States—will be an advantage. (Well, at least if you’re selling cement.) The stock lost 5.8% in 2010.

Deltic Timber (DEL) sells timber and timberland for development. Amazing the stock was up 22.7% in 2010. This year, with life gradually returning to the U.S. housing market—let’s say the housing market comes out of intensive care and investors conclude that the patient will actually survive—should be better.

Johnson Controls (JCI). The stock did amazingly well in 2010—up 42.3%--considering that two of the company’s three businesses were in sectors of the economy that had been crushed. 2011 will be a better year for the company’s auto interior and auto battery business and for its building-wide energy efficiency unit.

Rayonier (RYN) is another timber producer with a lot of land that it was busy developing—until the U.S. mortgage crisis. The gradual winding down of that crisis will make 2011 a better year for Rayonier. Not that 2010 was all that bad. The stock was up 29.4% for the year.

And, finally, here are my five adds for this year’s list.

Baidu (BIDU) is China’s leading search engine operator and it has just started to tap into the market for electronic retailing.

E.I. DuPont (DD). With its mix of seeds and enzymes acquired (not to recently) by buying Pioneer Hi-Bred and (very recently) Danisco, I think DuPont is targeting two of the biggest technology opportunities--and challenges—of the next decade: growing more food and producing more energy from plants without making the first challenge bigger.

Fluor (FLR). With a choice between Jacobs Engineering and Fluor, I’d go with Fluor and its bigger backlog of orders.

Gol (GOL). Air travel is exploding in emerging economies as economic growth leads to increases in the number of people who can afford to fly. And on top of that Brazil’s low–cost domestic airline can look forward to a big increase in traffic from Brazil’s hosting of the Olympics and the World Cup.

Yingli Green Energy Holding (YGE) is my choice for a horse to ride in China’s solar industry.

Look for the usual sporadic updates on the stocks in this portfolio over the next year.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Baidu and Johnson Controls as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.  I’ll have the fund’s portfolio as of the end of December posted in a few days.
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