On July 27, 2008, the Dow Jones Wilshire 5000, the broadest stock index in the U.S. - dropped to 10,093.70. It hasn't been this low since 2003. The financial media believes this historic drop in the markets is a signal that buy-and-hold investing is dead. Financial writer Michael Brush calls it the third-biggest lie on Wall Street, suggesting investors weren't adjusting their portfolios to accommodate for greater risk as stock prices continued to rise and the economy began to crater. Analyst Dayana Yochim suggests that investors should "buy TO hold" instead, arguing that sometimes it's not a bad thing to sell.
But there are still some die-hard buy-and-hold investors on the EfficientMarket.ca blog. Their writers suggest that investors should buy and hold forever; not three years or five years but permanently. I couldn't agree more. While the recent market mayhem has caused many to assume that buy-and-hold investing is dead, in reality, this tried-and-true method is still kicking.
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In 2002, I wrote an investment newsletter for friends and family. In each issue I analyzed a micro cap, small cap, mid cap and large cap stock. Today, as I look back on my stock picks, it's not the 117% cumulative return (versus 1% for DJ Wilshire 5000) over more than seven years that's impressive, but rather amazingly, that only five stocks out of 96 lost 100% of their value. This, more than anything, tells me that buy and hold works. Here are the first four of 48 picks.
Micro Cap - U.S. Physical Therapy Inc. (Nasdaq:USPH)
Physical therapy involves getting someone who is relatively immobile healthy again. One of the largest operators of physical therapy outpatient clinics in the country is U.S. Physical Therapy, which owns 367 facilities in 42 states. It is a nationwide operation - and it's profitable to boot. The company recently issued preliminary second-quarter results that had it growing earnings per share by seven cents, or 29%, and revenues by 9% to $51.8 million. In addition, it raised full-year guidance at the low-end of the range from 84 cents to 93 cents, a whopping nine cents. With a forward P/E of about 14, I like the odds of that expanding in the coming months and years.
Small Cap - Heartland Payment Systems Inc. (NYSE:HPY)
Earlier this year, the country's fifth-largest payment processing business had its security breached, compromising the data of more than 100 million credit cards. It went on a crusade to make this information far more secure. Six months later, everything appears to be going just fine. In the third quarter, it will release its fully encrypted E3 terminal solution, which provides its customers with the ultimate in protection. At the William Blair & Company growth stock conference in June, the company projected earnings per share (excluding breach expenses) in 2009 as high as $1 per share with 12-14% revenue growth. HPY is currently trading at 70% off its September 2008 high of $33 - it's a screaming buy.
Mid Cap - Hansen Natural Corp. (Nasdaq:HANS)
I've liked Hansen since way back in 2002, long before its Monster energy drink came along. It's handling hypergrowth exceedingly well and should continue to do so in the future. With Coca Cola (NYSE:KO) on board as its distributor in North America and the U.K., it's only a matter of time before the two companies expand their working relationship. Financial services firm Stifel Nicolaus recently dropped 2009 and 2010 EPS guidance to $2.18 and $2.44 per share, respectively. Given the growth potential outside its current markets, not to mention a large premium should Coke take it out, I can't help but love its potential.
Large Cap - Starbucks Corp. (Nasdaq:SBUX)
Since Howard Schultz has come back as full-time CEO to run the coffee chain he grew over 20-plus years, results have begun to percolate. Third-quarter earnings were better than expected thanks mostly to cost cutting. Starbucks needed to trim down and now that most of this is out of the way, it can concentrate on continuing to give customers what they want, which surprisingly, could include beer and wine. Using the dead carcass of an old store location, the company is testing an adult version of Starbucks called
Coffee and Tea. I see this is as bigger than anything it's ever done before and could be as transformational as the McDonald's acquisition of Chipotle (NYSE:CMG) back in the late 1990s.
I believe in buy and hold and you should too. If you pick truly solid companies, they should continue to deliver good results year in and year out. After all, a major drop in the market might hit most companies, but it is only the solid performers with strong fundamentals that will bounce back. (For additional reading, take a look at Finding Solid Buy-And-Hold Stocks, and Buy-And-Hold Investing Vs. Market Timing
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