A Picture Perfect Portfolio

By AnnaLisa Kraft - September 18, 2012 | Tickers: AAPL, BGS, CAB, GE, LXU, VVUS | 0 Comments

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When creating a sculpture or a painting an artist usually first sketches out the objective. Similarly when crafting a portfolio you have to sketch out your objective. Is this a retirement portfolio, an income portfolio a growth or value portfolio?

Let’s say you want some growth, value and income, an all around portfolio. You might trade in and out a little but generally you’re trying for something that will stand the test of time much like a work of art.

Maybe in the beginning of your investing career you did what art students have done for centuries, copying Old Masters. You followed ‘whales’ like Buffett or Icahn and soon learned some basic principles of designing a portfolio.

Now you feel you’re ready to break out. The seven principles of design in art can serve you in investing as well and they are: balance, contrast, emphasis, pattern, rhythm, variety and unity. Balance could be interpreted as proportionate weightings of the stocks. No one stock or sector should become top heavy. A mix of mid-cap, large, small and small cap and defensives and cyclicals should be represented as part of your composition. In a word, diversification.

Let’s start with a conglomerate—think of it as the pattern for the background. General Electric Company (NYSE: GE) encompasses infrastructure, aviation, alternative energy, medical technology, finance and housing (appliances). General Electric has a yield of 3.10% and a P/E of 19.16. It certainly qualifies as a large cap at $223.23 billion.  Like so many others it has touched a 52 week high at $22.24. Buffett has been in this name; he bought the warrants and preferred stock in 2008 when he said of GE in an interview, ”They’re going to be around five or ten or one hundred years from now.. If you buy at the right time, you’ll probably make some money.” Buffett also said GE is the”.. backbone of American industry.”

Now you need some contrast, maybe a small cap like LSB Industries, Inc (NYSE: LXU), a $937.51 million market cap chemical company. CEO Jack Golsen was listed as one of the best small cap CEOs by Chiefist.com which rates CEOs on their performance on metrics such as return of equity, margin expansion, EPS growth and book value per share. The P/E is 13.21 and it’s got a $50.00 price target for some 20% upside. There are two parts to the business, Climate Control (HVAC) and Chemical, mainly ammonia based chemicals for industry and agricultural uses. The Oklahoma City based company was founded in 1968 by Golsen. When it reported Q2 earnings in August it crushed EPS expectations beating by $0.02 a share for a 20% beat and margins increased as well.

For a mid-cap how about a destination retailer like Cabela’s Inc (NYSE: CAB). I’ve written twice about Cabela’s. The stock keeps powering higher with impressive velocity. Cabela’s is a retailer of shooting, hunting, fishing and camping equipment. The P/E is 23.26 and is yet another name at a 52 week high of $53.70. Cabela’s can supply the element of rhythm, a sense of movement; it’s doubled from its 52 week low of $19.12 and is on its way to a triple. Cabela’s CEO Thomas Millner is on the Chiefist.com list for best mid-cap CEOs.

How about some unity with a mid-cap defensive consumer staple like B&G Foods? It has the biggest yield of the group at 3.50% and a P/E of 25.82. A little high but remember all these names have moved quite a bit in the last few months, yields were higher and P/E’s were lower. B&G Foods owns brands like Ortega, Polaner preserves, Grandma’s Molasses and Cream of Wheat. They are primarily in the business of buying languishing food companies and turning them around. It’s recycling at its best. The beta is .74 and is the kind of low-key and defensive element you need for market downturns.

Next we need emphasis, the one area that is the focus of the composition. Well, if you’re going to go big you have to pick Apple Inc (NASDAQ: AAPL) a mega-cap tech name. The best retailer in the world maybe, with the coolest products.  When a mall gets an Apple store it adds $12 per square foot in revenue. Preorders for the iPhone 5 sold out within hours. Unless you’ve been hiding in the caves at Lascaux (art history reference) you know it hit an all time high again. Next month an iPad mini is expected to be announced. The P/E is only 16.36. The company has no debt and is still sitting on billions in cash. Apple offers a 1.60% dividend. Despite all the headlines on Apple its beta is only .88. One nice thing about owning Apple is that there is no dearth of information about the company. You can read a new headline every few minutes so no excuses about due diligence here.

Finally, let’s have a biotech for variety. Just a very small daub because this is speculative. You could choose either Arena Pharmaceuticals or Vivus (NASDAQ: VVUS). Since this is not a paint-by-numbers kit you have a choice.  Both these names have received FDA approval for their anti-obesity drugs so you don’t have to worry about that hurdle and both those drugs come to market within the next year.  Arena’s drug Belviq (lorcaserin) is waiting on DEA approval and could come to market by late 2012.  Arena may have the first mover advantage over Vivus. Both have negative EPS now but that is usually the way with biotechs until the rollout is fully under way. Americans don’t want to be overweight but they still love to eat so any diet drug that helps Americans stay healthy and slim is poised to be a blockbuster.  After Congress proposed a ban on saccharin in 1977 a huge public outcry and over 100,000 letters came in within a week causing Congress to place a moratorium on the ban. There is a market for a diet drug that works since fen-phen was removed from stores years ago.

As I said, this is not a paint-by-numbers kit., just an art lesson with some examples for your perusal. There are almost as many stocks as there are colors and a million ways to compose your work of art.

With small caps, mid caps, large caps, defensives, cyclicals and a spec in multiple sectors you can have a very attractive portfolio. Just pretend you’re a starving artist, however, and don’t pay up for your materials.  Almost all of these are at 52 week highs. Wait for pullbacks.

Soon, if you patiently craft that portfolio with due diligence you will have a brokerage statement you’ll want to frame.

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