Question:
I hate say it, but I’m bored with our portfolio. We’ve agreed to separate around 20% to invest more aggressively, rather than the tried-and-true blue chips. As far as a time horizon, we have a 22 year age difference between us, so Rick will retire long before I do. Any “exciting” names you can give us?
Answer:
First, let’s be clear: There is absolutely nothing wrong with a boring portfolio. It surely alleviates some stress, and we’re sure some wished they had a more boring portfolio in 2008.
As for some exciting names, let’s look at some of the picks we have from our own Traditional Portfolio: Celgene, Cummins, and Qualcomm.
Celgene Corp. (NASDAQ: CELG) is a global biopharmaceutical company, focusing on the discovery, development, and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases. By most accounts, the company’s position in the global hematology (blood-related) space is unrivaled, making it one of the leaders among the biotech industry.
The company is expected to grow earnings by 24% a year for the next five to seven years. The company’s blockbuster Revlimid treatment for multiple myeloma has been growing in the high double digits for several years. Though it did have a temporary setback in June when trying to gain approval in the European Union, the market believes in Celgene’s prospect having bid the shares about 33% higher in the last few months. The company has several other drug catalysts in the pipeline as well.
One name we like in the Industrials sector is Cummins Inc. (NYSE: CMI), which provides diesel and natural gas engines to global markets. Cummins is the largest manufacturer of heavy duty on-highway diesel engines, providing one of the only 15 liter diesel engines to the market. The company sells its engines to truck and boat manufacturers, and it also manufactures electric generators and engine components.
Cummins is currently benefitting from regulated changes in the diesel engine industry aimed at reducing exhaust emissions. These new regulations caused Caterpillar Inc. (NYSE: CAT) to exit the heavy truck engine business at the same time companies like Paccar Inc. (NASDAQ: PCAR) were entering the business. Being the most widely-known name in that industry has worked to the benefit of Cummins.
However, since the company operates as an engine manufacturer to markets around the globe, Cummins is dependent on economic growth to provide an environment for company specific sales growth. So just be aware that this will cause earnings cyclicality.
Qualcomm Inc. (NASDAQ: QCOM) develops, designs, manufactures, and markets digital wireless telecommunications products and services. The company develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions, and global positioning system products. Holding more than 10,000 patents related to CDMA, it grants licenses to use portions of its intellectual property portfolio and receives royalties based on sales by licensees of wireless telecommunications equipment products incorporating its patented technologies.
With its enviable position in an industry with high entry barriers, QCOM is equipped to reap generous windfalls from the progression to 3G and 4G wireless technologies through its unparalleled intellectual property rooted in CDMA wireless standards. The company currently collects a 3% to 5% royalty on the sale of every handset that includes even a sliver of 3G technology. Basically, these phones can’t connect to a CDMA network without paying a royalty to Qualcomm. Qualcomm’s 4G intellectual property portfolio is considered robust by analysts as well.
We also like Advance Auto Parts, Inc. (NYSE: AAP), as a good defensive and growth play in one. Given that the average age of a car on the road today is 11 years old, we believe this company will continue to grow. Additionally, Advance Auto Parts has the smallest market share in a fragmented industry. We believe they have plenty of room to grow. The company has a long-term growth of 13%. While it has a low dividend yield, we believe the company can manage their inventory as well as their competitors.
Question:
It’s that time of year when I start looking at stocks for my grandkids. This year they’re interested in GameStop or Hot Topic—that’s where they’re shopping. Are either of these two stocks something good for teens to own—or should I just get them gift cards to the stores?
Answer:
First, we believe it is never a bad idea to get teenagers interested in investing.
While most teenagers prefer instant gratification, the compounding interest effect that can take place when investing for a long time is reason enough to have them invest in stocks. For example, say your grandchild is 15 years old and begins saving and investing just $1,000 a year. Assuming his investment grows by 8% a year, he or she would have about $50,000 by the time they’re 35. In 50 years, or pretty much at retirement age, they’d have more than $600,000 saved. If they were investing $5,000 a year, they could be looking at a portfolio worth $3 million in 50 years.
Even at $50 a year, your return could be $30,000, which is obviously not enough to retire on, but 50 years from now, it’ll be a heck of a lot better than the 2012 Madden NFL game for Xbox.
That being said, neither GameStop nor Hot Topic meet our strict standards for financial strength and quality, but that doesn’t necessarily mean their bad investments.
GameStop Corp. (NYSE: GME) has a few reasons to like it. It has no outstanding debt, and potential catalysts are right around the corner with the upcoming releases of new video game consoles: first the launch of the Wii U later this year, then the PlayStation 4, and the new Xbox in 2013.
However, we would not touch this stock. There are too many structural problems in the industry and too much competition from much bigger players with deeper pockets. Competitors like Amazon or E-Bay do not have the same overhead expense, and can likely outcompete GameStop on prices as a result. Stores like Wal-Mart and Target obviously have tremendous advantages when it comes to scale and distribution capabilities.
Lastly, games are going more mobile/digital in a similar fashion to the music industry. Savvy investors have realized this. That is likely why you’ve seen the shares lose 60% of their value over the last five years, and they have remained in the doldrums for several years now.
As for Hot Topic Inc. (NASDAQ: HOTT), we recommend avoiding this stock as well. The company has posted operating losses in each of the past two years. The company is in the midst of a restructuring plan that includes reducing the number of stores to lower overhead costs and adjusting the merchandise assortment.
While the company has no debt, pays a dividend yield just under 4%, and is trying to cut costs, teen unemployment remains high at about 25% not to mention their fashion tastes are far too fickle.
That said, there are several names that we recommend for teens that are all worth a look: McDonald’s Corp. (NYSE: MCD), The Walt Disney Company (NYSE: DIS), Nike, Inc. (NYSE: NKE), Starbucks Corp. (NASDAQ: SBUX), and Yum! Brands Inc. (NYSE: YUM).
At Henssler Financial we believe you should Live Ready. If you have questions regarding your portfolio holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
