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A thought experiment in long-term investing: What stock would you buy for a newborn?
04/25/2012 4:30 pm EST
Pampers, check. Binky, check. Goodnight Moon, check.
But what do you give the baby for a portfolio warmer?
It’s an interesting thought experiment for anyone who claims to be a long-term investor, even if there is no baby shower on the horizon. So what stock would you buy if you had a 20-year holding period ahead of you?
Something cheap now because it’s either deeply out of favor or barely a glint in a Sergey Brin’s eye. (Unlike say, asteroid mining.)
Something with a long-term and very solid trend at its back.
And something so stable that it’s certain to be around in 20 years.
So, no Apple (AAPL)—already too expensive and unlikely to king of the technology hill in 20 years.
Gold? Certainly will be around in 20 years and it’s hard to bet against depreciating currencies and inflating prices for the next 20 years. Though even with the recent pullback, gold is hardly cheap and it’s certainly not deeply out of favor.
European stocks? Everybody hates them, but when’s the recovery? Six months (in your dreams but still possible)? Two years? Never? Too unpredictable.
Natural gas? Deeply out of favor, true. But I’d bet the recovery is two to five years away rather than 20. Within a 20-year horizon, I think baby’s natural gas portfolio could go through two or three more boom and bust cycles.
My choice, finally, and hands down is the solar sector. It’s still collapsing (sorry, I mean “rationalizing production”), but costs are still coming down (at the survivors), the world will continue to need more energy (especially if everyone aspires to U.S.-style energy consumption), and even if the world turns out to have as much natural gas as is currently predicted by models that have only the sketchiest of data on depletion rates for natural gas from wells in shale formations, costs for producing that energy will continue to climb.
But what solar stock?
No guarantee that any of the independents, such as First Solar (FSLR) will be able to find the cash to get through the sector rationalization without a bankruptcy. Q-Cells, once the biggest manufacturers of solar cells in the world, filed for bankruptcy this month.
China’s solar companies such as Yingli Green Energy (YGE) or Trina Solar (TSL) now have the backing (and deep pockets) of the Chinese government behind them. But that backing is subject to changes in the political wind and the government in Beijing has a disconcerting habit of shuffling assets among companies in a sector in order to further national economic goals. (The mobile phone sector is a chilling example.)
My pick for 20 years finally goes to a U.S. company with an oil company parent, SunPower (SPWR). The stock is certainly cheap: It’s down 65% in the last 12 months and even more if you go back to November 2007 when this current $5.42 a share stock traded at $129.23. But Total (TOT), Europe’s third-largest oil company, bought 60% of SunPower in April 2011, giving the solar company that backing it needs to be one of the survivors in this industry collapse. (Total’s cash resources also give SunPower the ability to finance the kind of utility-scale energy developments that are currently the biggest source of growth in the sector.) And SunPower, which has its origins in Silicon Valley’s chip industry, continues to make progress at taking costs out of its manufacturing process and increasing the efficiency with which its cells convert sunlight to electricity. On April 16, SunPower announced that it was on track to hit its goal of generating electricity at a cost of 86 cents an efficiency-adjusted watt by the end of 2012. (SunPower is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com// . Yingli Green Energy is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/ and my long-term portfolio.)
So stuff a few shares—or more since at $5.42 you can afford to be generous—in the snuggly and whisper “Solar” into baby’s ear.
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 http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple and Yingli Green Energy as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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