by Lawrence Meyers | September 4, 2012 1:20 pm
Every long-term portfolio should have some sector diversification, but diversity doesn’t mean squat if you don’t have the right holdings.
In this weekly series, we will look at each major market sector and even a few subsectors. I’ll select a stock from that sector that I think every long-term diversified portfolio should have, and one that prevailing wisdom says everyone should have … but that I think you’d be better off without.
As a bonus, we’ll also examine a primary ETF from the sector to see if its holdings truly represent the sector.
Our first sector is near and dear to everyone’s heart because it involves shopping! Yes, this would be the consumer discretionary sector.
This has been a tricky sector as of late because the financial crisis has so badly slammed everyone’s discretionary income. Thus, it’s almost as if you want to find a stock that is kind of a consumer staple within consumer discretionary, and avoid stocks that are showing signs of stress with the ebb and flow of consumer confidence numbers.
I define a stock in this sector as being a company from which consumers purchase items that are not absolute necessities, like groceries.
To give an idea of what most consider to be consumer discretionary, here’s a recent list of the top 10 holdings of the Select Sector Consumer Discretionary SPDR (NYSE:XLY) — and why I don’t consider these sector ETFs to be terribly reliable:
These days, I consider McDonald’s a consumer staple, and I might go so far as to say all the cable companies mentioned are, as well. Technically, people could do without them, but the truth is that McDonald’s is a cheap and viable way to feed a family, and it’s difficult to find a house without a TV. Target is a crossover, as it now carries consumer staples. Automobiles are discretionary but also cyclical.
The goal of this series isn’t just to find a strong sector pick, but to dig out stocks you might not have thought about in the sector.
For example: I consider Disney to be a “Forever Hold” stock. But unless you’ve been reading my column for a while, you would not think of Genuine Parts (NYSE:GPC), a classic Peter Lynch stalwart play I wrote about recently.
My thesis is that Genuine Parts is so well-entrenched, and has such a huge presence as a distributor, and that everything has parts and most things break down and need replacement parts, that you could hold this stock for a long time.
The key is that GPC isn’t a parts manufacturer, but a distributor. That’s where the money is in just about everything. Genuine Parts’ stock remains expensive at roughly 16 times trailing earnings, but for a long-term hold, there’s no harm in either buying now or waiting for a pullback.
I would, however, get the heck out of Gannett Co. (NYSE:GCI).
Newspapers are a dying industry. People are getting their information from all over the Internet, and many don’t like the perceived bias many newspapers carry.
Gannett, which also operates non-paper media, still has good cash flow, but earnings are falling. Operating revenues were down 2%. The publishing segment saw a 5.5% revenue decline. Most importantly, advertising revenue was down 8% — and this is the real key.
The only thing keeping newspapers afloat are the big company advertisements, and as I’ve written, they will pull those ads at some point — likely sooner rather than later. You don’t want to be holding Gannett when that happens. And it will happen.
Sell all newspaper stocks now, including Gannett.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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