Your Core Portfolio: Large-Cap Value Stocks

by Lawrence Meyers | June 21, 2013 10:53 am

So what is a “long-term diversified portfolio,” anyway?

The term describes a portfolio diversified across many different asset classes. From my experience during the financial crisis and market meltdown, I discovered that such diversification can really protect investors from downside risk while also offering solid upside during the good times.

Your own risk tolerance and financial plan will determine the actual construction of that portfolio, but in this series of articles, I’m postulating an investor with a 30-year time horizon, and average risk tolerance. Today I’ll focus on large-cap value stocks, which might make up 15% of my portfolio.

With large-cap value stocks, I always start with an “anchor” — an ETF that represents the class of stocks — and then turbocharge it with some important big names. Value stocks are getting hard to come by, though, so what might be value today might not have been yesterday or even tomorrow.

I’ll start in this asset class with a core position in the iShares Russell 1000 Value Index (IWD[1]). One might take issue with holdings that include Chevron (CVX[2]), General Electric (GE[3]) and Berkshire Hathaway (BRK.B[4]) and not call them “value,” but asset allocation can overlap sometimes.

In this case, I also think financials remain general undervalued because of market skittishness. Vanguard Financials ETF (VFH[5]) has a 2% yield, and has all the big names including Citigroup (C[6]). I also like US Bancorp (USB[7]) for this category, as it has always avoided exposure to the toxic assets every other bank had.

So how do you supercharge it?

I think the great asset manager John Malone and his Liberty empire have traditionally been undervalued, often because the stock symbols and structures keep changing. In this case, Liberty Media Interactive (LINTA[8]) is the way to go, driven by the core holding of QVC. It exists as a cash flow machine for the holding company.

I still think DirecTV (DTV[9]) is undervalued, despite its decent return during the past couple of years. Latin America is the big thing for DirecTV, and more and more people want the kind of on-demand experience DirecTV has. It makes lots of money — billions upon billions — and is really kicking the butts of competitors.

I’m even going to put Intel (INTC[10]) in here. That might come as surprise, but the company is too dominant in its field to ignore. The stock is 8% off its high — and in fact, at 20% year-to-date, it’s the leading pick in InvestorPlace‘s Best Stocks of 2013[11] contest — and has $10 billion in net cash, and generated free cash flow of $7.7 billion last year. That’s a powerful amount of money. So in addition to trading at a cash-effective price of $23.47, it generates about $1.60 in free cash each year. I think it’s a solid value at these levels.

Finally, I’m adding Teva Pharmaceutical (TEVA[12]). The company is a leading generic provider and also has its own proprietary drugs. Generics will continue to be the way things go, especially as the government takes over healthcare. The company pays a 2.8% dividend and remains cheap on a price/earnings-to-growth basis.

As of this writing Lawrence Meyers was long GE and BRK.B. He is president of PDL Broker, Inc.[13], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[14] and blogs about public policy, journalistic integrity, popular culture, and world affairs[15]. Contact him at[16] and follow his tweets @ichabodscranium.

  1. IWD:
  2. CVX:
  3. GE:
  4. BRK.B:
  5. VFH:
  6. C:
  7. USB:
  8. LINTA:
  9. DTV:
  10. INTC:
  11. Best Stocks of 2013:
  12. TEVA:
  13. PDL Broker, Inc.:
  14. written two books:
  15. blogs about public policy, journalistic integrity, popular culture, and world affairs:

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