Serious investors need a long-term diversified portfolio. But what exactly does that mean?
The term describes a portfolio diversified across many different asset classes. That kind of diversification offers the ideal blend of protection and opportunity, as I learned first-hand during the market meltdown after the financial crisis.
As always, your personal portfolio should be determined by your own risk tolerance and financial plan, but this series of articles assumes an investor with a 30-year time horizon, and average risk tolerance. Today I’m going to tackle the most challenging asset class: mid-cap growth stocks.
Mid-cap stocks are generally considered to be companies that have a market cap of $1 billion to $10 billion, although some folks like to make the cutoff closer to $5 billion. That seems like splitting hairs to me, so for the purposes of this article, we’ll define mid-cap as roughly $1 billion to $10 billion in market cap.
By growing beyond the small-cap phase, mid-cap stocks have usually proved some degree of stability, but still have the opportunity for significant growth. While ten-baggers are not out of the question here, they are harder to find than in the small cap arena. I’m allocating 4% of the overall portfolio to this asset class.
If you’ve read the other articles in this series, you’ll know I want to anchor the sector with an ETF or mutual fund. So I’m grounding this portion of the portfolio with a core position in the iShares Russell Midcap Growth Index (IWP), a diversified index whose top 10 holdings comprise some 8.5% of its total assets. Its largest holding is Liberty Global (LBTYK), which is John Malone’s massive international cable provider. Second to that is Crown Castle International (CCI), a huge wireless infrastructure play.
From there, I’ll add stocks I want to own until their growth days are over, which typically happens once the stock falls below 13-15% annualized EPS growth. I’ll start with retailers like Dick’s Sporting Goods (DKS), which is posting a solid 15% earnings growth. I’m also tossing in the great brand name Tiffany & Co. (TIF). Its numbers have been a bit choppy lately, but I’m banking on its 12% long term growth rate and a brand name that will always be sterling, so to speak.
If you read my column, you know I love and own the best of the dollar stores, Dollar Tree, Inc. (DLTR), which just continually executes on its growth plan and has brilliantly managed its move into the grocery market. So it’s no surprise that I’m recommending it here.
As for other industries, I love the 13% growth Perrigo Co. (PRGO) is enjoying in OTC and generic drug stocks. I’m adding Ashford Hospitality Trust (AHT), the best of the hotel REITs with a 4.1% yield. I also like Affilated Managers Group (AMG), an asset management company providing investment management services to mutual funds, institutional clients, and high net worth individuals in the United States. I expect good things from it in the future.
I’m also driving CarMax (KMX) into the mix. The auto industry continues to drive forward in this economy, and CarMax’s 13% growth revs my engine. The same goes for AutoNation (AN) and its 18% growth rate.
All of these companies also have solid management, robust balance sheets, and a habit of generating a lot of free cash flow.
You can’t ask for much better than that.
Lawrence Meyers is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. As of this writing, he was long IWP, AHT, and DLTR. He has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.