Nine months agoI argued in favour of a portfolio with aweighted beta of 0.72, comprising the following six stocks: 25% ofARM Holdings (LSE:ARM), 12% ofDiageo, 18% ofSABMiller (LSE: SAB),30% ofBP (LSE: BP), 10% ofNational Gridand 5% ofASOS (LSE: ASC).
Heres how ithas performed so far, and why BP and ARM will continue to make up to 55% of my virtual portfolio.
A Balanced Portfolio
The value has increased by 9% over the period, for an all-in pre-tax return of about12%, including dividends and excluding costs, since 9 June 2014. The average yield of the portfolio is roughly in line with that of the market, but the FTSE 100 is up only 2% over the period.
The rise in ARM has been offset by the fall in BP, but Id retain exposure to both stocks in the same amount. The former is a strong growth play, while the latter is a decent recovery story.
While I am not too disappointed with the performance of SAB, ASOS and National Grid, I think Diageo is not a stock Id be happy to retain. Instead, Id replace it with Unilever (LSE: ULVR).
Remember: we are after steady, long-term gross returns in the double-digit territory on an annual basis.
Diageo & SAB
I am not one of those who argue in favour of changes in a portfolio every year or on a quarterly basis, but I am glad to make an exception because Diageo looks a bit expensive, and I am not convinced its management team is doing all it can to deliver value to shareholders.
Last year, I thought Diageo would offer more value than SAB, but the lattersperformance has convinced me that Diageo is not the safest betin the sector.
SABhas been the subject ofrecurrent takeover talk for a long time, and its shares have been boosted by takeover rumours in the last 18 months:I dont buy into an imminent change of ownership, to be honest, and I am betting instead on a recovery in emerging markets and SABs strong fundamentals.
As far as M&A talk is concerned, however, its more likely that SAB will make another attempt at striking a deal with Heineken,whichwould benefit its own valuation in the short term.
Elsewhere in the consumer space, Unilever is not incredibly cheap but its stock offers a higher yield than that of Diageo, and its valuation will likely continue to dictate a premium because investors will likely pay up for its quality earnings, particularly if volatility springs back.That means Unilevers trading multiples will likely rise over time.
I am a big fan of Unilevers portfolio of products, and its management team boasts a strong track record. On top of that, targeted divestments will boost value in the next 18 months, in my view.
BP, ARM & ASOS
BPcontinues to be a rather attractive investment proposition right now, although its down 10% since June last year. It will benefit from rising oil prices, which I think are likely from the third quarter onwards. I am cautiously optimistic about its dividend policy, too.BP could comfortably rise above 500p, where it traded in the spring of 2014, and I would be surprised if it disappointed investors in its upcoming results.
I still likeARM, too, in spite of a terrific rally for its stock in recent months a price target in the region of 14 is justified based on its realistic growth projections for earnings and dividends, which combine with a rising market share for its core products.
Finally, ASOS has been holding up pretty well in recent times, and its shares have recovered from a terrific plunge in 2014. They lookexpensive, but there are a few reasons why shareholdersmay want to stay invested.Of course, volatility in its stock price could be just around the corner, particularly if operating profit margins remain under pressure or fall, but thats why only 5% of the portfolio would be invested in this high-risk stock.
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