Last year, I took the original “coffee-can” long-term portfolio developed by Capital Group’s Bob Kirby back in the 1970s — which was then adapted by Morningstar (NASDAQ:MORN) in June 2005 — and added a twist by replacing three of Morningstar’s stocks with three ideas of my own.
It’s now been some time since my July update on its progress, so with 2012 officially in the books, it’s time to take a final look back at the past year’s performance, then chart a course for a year ahead by highlighting the stocks I believe will outperform in 2013.
I picked three stocks – Franklin Resources (NYSE:BEN), U.S. Bancorp (NYSE:USB) and Liberty Interactive (NASDAQ:LINTA) — to replace Federated Investors (NYSE:FII), Fifth Third Bank (NASDAQ:FITB) and IAC/InterActive (NASDAQ:IACI), with the seven other stocks remaining the same.
The good news: My three stocks achieved a total return of 3.5% from April 9 through the end of the year, compared to 2.4% for the three that were replaced.
The bad news: Although all three of my stocks achieved positive gains in 2012, they underperformed the SPDR S&P 500 ETF (NYSE:SPY) by 140 basis points. I’m not happy about that, but I’m hoping all three will come through in 2013.
Overall, the revised coffee-can portfolio was a thing of beauty in 2012, up 7.6% since April — that’s 270 basis points better than the SPY and 30 basis points better than the original portfolio. The best-performing stock since April was Iron Mountain (NYSE:IRM), followed closely by Diageo (NYSE:DEO). Strayer Education (NASDAQ:STRA) was the only negative, albeit in a big way, off more than 33%. I’m not sure if educational stocks can make a comeback given Obama’s re-election, but I also don’t think Strayer will deliver a fourth consecutive year of negative returns. If you’re a value investor, now’s probably the best time to get in. But don’t bet large.
|Average Total Return||–||+7.6%|
|SPDR S&P 500 ETF||SPY||+4.9%|
Here’s a closer look at three of my favorite stocks in the portfolio for this year:
Call me crazy, but I think one of the stocks leading the charge for the coffee-can portfolio in 2013 will be none other than Berkshire Hathaway (NYSE:BRK.B). Warren Buffett’s stock is now back to where it was trading at the beginning of 2008. Since then, he has made lots of acquisitions and added two money managers to his staff. With a successor as CEO already chosen (although unnamed), his bench has never been deeper.
Speaking of Berkshire Hathaway, the Omaha company owns 61 million shares in U.S. Bancorp, making it one of the largest shareholders. Being a relatively boring bank (probably an oxymoron), the biggest news out of Minneapolis (where it’s based) is the rumor that USB is in the lead to win the naming rights to the Minnesota Vikings’ soon-to-be-built football stadium. While that’s never a reason to invest in a company, it does suggest the bank feels confident its future will outlive the length of the naming rights contract.
With few gains after the first quarter in 2012, U.S. Bancorp’s stock flatlined somewhat … but I see smooth sailing in 2013 as the economy continues to slowly recover.
Lastly, although Diageo has had a good year, I think the fireworks are only beginning as it continues to play the consolidation game in the liquor business. I’d be shocked if it didn’t participate in the acquisition of Beam (NYSE:BEAM) in 2013. It dropped out of the bidding for Jose Cuervo tequila in December; however, Beam has both bourbon and tequila brands that would complete Diageo’s global lineup.
Just as it was important for Diageo to take control of India’s United Spirits in 2012, it’s even more essential that it acquire Beam this year. I see it happening in the second half of the year once they’ve closed the books on United Spirits, which will light a serious fire under its stock.
I see positive gains for the revised coffee-can portfolio in 2013, including beating the SPY by a minimum of 300 basis points. Stay tuned for future updates.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.