Tailoring Portfolios to Coronavirus and Recession
Posted: June 09, 2020
June 8, 2020 (Maple Hill Syndicate) – In February through May, my firm has been recasting our clients’ portfolios to reflect a continuing coronavirus epidemic, and a recession of unknown length.
We maintain a Model Portfolio, and about three quarters of our client accounts track it pretty closely. Here are the stocks in it, all of which I also personally own.
Technology Holdings
As the country attempt to simulate normal business via Zoom conferences and such, it’s clear that technology will be even more vital to the economy for the next few years.
Semiconductors are vital to tech, and Intel Corp. (INTC) is the nation’s largest semiconductor company. It also has a nice history of raising its dividend consistently.
With people spending more time at home, they may have use for a Sony PlayStation, a new model of which comes out around year-end. That bodes well for Sony Corp. (SNE), a Japanese conglomerate that also makes parts for iPhones and produces movies.
Speaking of iPhones, how can you not be impressed by the cash hoard at Apple Inc. (AAPL)? It has $40 billion in cash and near-cash, a good thing in tough times.
If technology will play an even more central role in the next ten years, cybersecurity becomes especially important. That’s the specialty of Check Point Software (CHKP), an Israeli company that trades actively in the U.S. The company is debt-free.
Health Care
The coronavirus epidemic draws attention to the importance of health care, and may lead to more sympathetic regulation of health-care companies. If the February-March bear market should resume, holdings in this sector should be somewhat resistant to the downturn.
We recently bought Edwards Lifesciences Corp. (EW), which makes artificial health valves and other cardiovascular products. In the past ten years, Edwards has grown revenue at a 14% annual clip, and earnings at nearly 18%.
We already owned Zoetis Inc. (ZTS), which makes medications for pets and farm animals. It has averaged 30% earnings growth the past five years.
Our newest holding in the group, still under accumulation, is Pfizer Inc. (PFE). It is working on a potential coronavirus vaccine. Even if it doesn’t succeed, it has a good chance to be chosen to mass-produce a vaccine developed by someone else.
Media
In the communications and media sector, we bought ViacomCBS Inc. (VIAC) shares on weakness this year. The company owns some 3,600 films and more than 140,000 television episodes. Assets include Paramount Pictures, CBS Television Network, 29 local TV stations, Simon & Schuster publishing, and a bunch of other channels.
Walt Disney Co. (DIS) is hurt by the shuttering of its theme parks; we expect reopening to be halting and difficult. But we like the synergy of its divisions, admire its loyal following among families, and believe that its ABC TV operation is underrated.
Alphabet Inc. (GOOGL), which owns Google and You Tube, is a leader in artificial intelligence, and an extremely innovative company.
Recession Resistant
Three companies in our Model Portfolio were picked because we think they are resistant to recession. The cornerstone is Wal-Mart Inc. (WMT), whose cavernous grocery sections draw shoppers who may also buy other merchandise. Its low-price policies usually help it gain market share in recessions.
America’s Car-Mart Inc. (CRMT) has turned a profit 15 years in a row, including recession-wracked 2008. It sells used cars to people with bad credit, mainly in the South. As with Wal-Mart, people may trade down from more expensive alternatives.
Berkshire Hathaway Inc. (BRK.B), Warren Buffett’s conglomerate, stayed profitable in past recessions. In the 2007-2009 one, Buffett gave much-needed cash infusions to General Electric and Goldman Sachs, on terms favorable to Berkshire. With $42 billion in cash, he might do such a thing again.
Also chosen for what I hope are its defensive characteristics was Societe Bic SA, a French company that makes Big pens, lighters and razors – stable products in my view.
Other Holdings
Some of my clients prohibit holding Chinese stocks. But for most, I own China Construction Bank Corp. (CICHY) in mainland China and CK Asset Holdings Ltd. in Hong Kong (CHKGF). To me, the Chinese economy is too big and dynamic to ignore.
A brand-new holding is Electronic Arts Inc. (EA). If people are spending more time at home, they may play video games, and Electronic Arts is a powerhouse in that field.
Energy holdings helped my firm immensely in its early years, and hurt more recent. For most of this year, I’ve been entirely out. But in June, I’m dipping a toe back in, starting to accumulate Pioneer Natural Resources Co. (PXD).
Last, but definitely not least, I have a 9% to 10% position for most clients in SPDR Gold Trust (GLD). With central banks printing money like crazy around the world, I figure the price of gold is likely to rise like a cork in water.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.