Search Google for the words "Portfolio Construction" and you get 187,000 results. That's not a lot by search standards. Do the same for "iPad" and you get 102 million. However, in the game of equities, nothing is more important than how an investment portfolio is put together. Manulife Financial believes 50% of a portfolio should consist of companies in sectors with the best long-term growth prospects. The remaining 50% should be invested in counter-cyclical sectors like real estate, healthcare and consumer staples to help offset those periods when the portfolio's core is in the doldrums. I personally believe it's not that complicated. I'd rather own six great companies in the same sector than six bad ones, each from a different sector. To prove my point, I'll pull together a garden-variety, 10-stock portfolio from the ads in Canadian House and Home Magazine.
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I gave myself a definite disadvantage choosing a Canadian magazine. Of the 100 or so advertisers, many are naturally Canadian. I'm looking for American-based companies, or at least Canadian companies, trading on the Nasdaq or New York Stock Exchange. In the end, I found 19 suitable candidates. I will now go about the process of whittling the number down to 10. While I don't necessarily agree with Manulife's theory on portfolio construction, I do think it is right about having financial services and healthcare companies in the fold. Therefore, with only one healthcare advertiser in the magazine, I'll go with Schering Plough (Merck) (NYSE: MRK), maker of the Aerius oral antihistamine. As for banks, two are advertising in the magazine - Toronto Dominion Bank (NYSE: TD) and the Bank of Nova Scotia (NYSE: BNS). I'll go with Scotiabank because of its international presence outside Canada and the United States. While not as large as TD, I think its global exposure gives it greater future potential. However, both are good companies. This leaves me with eight more selections.
Consumer Goods Alternatives
Because I'm using a home-related magazine, a large number of the advertisers are consumer goods businesses. Ultimately, one or two will have to go in the portfolio. For now, I'll pick some of the alternatives, regardless of their investment merit. Once the portfolio is assembled, we'll figure out if the 10 make any sense long term. Excluding consumer goods, there are four sectors (industrial goods, basic materials, conglomerates and services) with at least one company represented for a total of seven. I'll take six of them, swapping out paint company Valspar (NYSE: VAL) for the larger and more diversified financial company, Berkshire Hathaway (NYSE: BRK.A), whose Benjamin Moore subsidiary also advertises in the magazine. This leaves one consumer goods company and we're done.
The Last Selection
This is a toss-up between Energizer Holdings (NYSE: ENR) and Procter & Gamble (NYSE: PG). While you can't deny the marketing machine that is P&G, Energizer does almost as good of a job generating cash, and its stock trades at a much more reasonable valuation than its larger competitor. Price-to-earnings, price-to-sales, price-to-cash flow and price-to-book are all lower for the Energizer bunny. It's hard to bet against Tide, but I'm a value guy.
The 10-Stock Magazine Portfolio
|Berkshire Hathaway (NYSE:BRK.A)||Financial||3M (NYSE:MMM)||Conglomerates|
|Best Buy (NYSE:BBY)||Services||Bank of Nova Scotia (NYSE:BNS)||Financial|
|CRH Plc (NYSE:CRH)||Industrial Goods||Schering Plough (NYSE:MRK)||Healthcare|
|Scotts Miracle Gro (NYSE:SMG)||Basic Materials||Petsmart (Nasdaq:PETM)||Services|
|Visa (NYSE:V)||Services||Energizer Holdings (NYSE:ENR)||Consumer Goods|
There you have it. From one magazine, I was able to pull together a 10-stock portfolio representing seven different sectors made up of seven large-cap and three mid-cap stocks. For P&G lovers, you can always swap out one of the three service-sector stocks and replace it with the pride of Cincinnati. Either way, you don't get much more stable than this. (For more stock analysis, take a look at Companies Reaching New Highs.)
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