Clorox, Netflix, Amazon, Citrix Systems, and Smuckers are great American companies in the S&P 500. These four companies have outperformed more than 475 other companies in the index. But this doesn’t mean I will or should add them to my taxable investment portfolio now or in the future.
When I see the S&P 500 YTD Top and Bottom 25 total return stocks, it truly gets me thinking about my current plan. The Top 25 has some fine companies but only one (Clorox) is on my Master Stock List and the Bottom 25 has none.
Sure, Amazon, Netflix, and J.M. Smuckers are fine companies but they didn’t make my list. Of ones I might (have and likely will still) consider is Eli Lilly and Gilead Sciences. It doesn’t make it right or wrong but when some stocks rise (as yours go down) it surely makes you rethink your plan.
Honestly, I’m feeling good about my plan and the current list of companies I’m targeting. Of course, buying stocks on my list at the right prices is critical but from a long-term perspective my companies are fairly healthy and should be able to withstand most downturns.
This site doesn’t subscribe to the trading approach to build wealth. Long-term buy and hold of quality stocks … that’s the approach I’m recommending. But when certain stocks are rising or getting battered, it’s important that the focus stays on the long-term.
Top 25 – Worth Buying?
There are some solid companies in the Top 25 but only a few of them would I call “quality” long-term holdings. At least that’s the way I see it, especially as it pertains to my goals and expectations for my portfolio.
Remember, I’m looking mainly for dividend stocks so many of these don’t fit my perimeters. Some are responding only to the current conditions. It’s likely they’re having their moment in the sun and then they’ll head back down soon enough.
And that’s the purpose of this entire article. When an extraordinary event occurs (i.e. virus), you’ll have some companies be presumed winners in that specific event. So they run up in price. It doesn’t necessarily change their long-term outlook and it doesn’t guarantee they’ll actually be winners.
Bottom Line: If you weren’t in these companies before they ran up then forget it. If you did own them then now might be an opportunity to sell based on the upward price movement. For my portfolio, I wouldn’t change what I’m doing or presume these stocks are what I should be buying for my long-term portfolio. The big question is, how were these stocks doing before the event (virus) and do they fit into your portfolio goals?
Bottom 25 – Worth Buying?
I’m a big fan of having some energy stocks in a portfolio. But here’s the problem I’ve seen over the last few years. Many of the high dividend yielding energy stocks are getting crushed this year and many companies are likely to be forced to close.
My focus in the energy sector has always been Exxon Mobil, Chevron, and Royal Dutch Shell. These are the quality names that can withstand downturns (or events) and can actually take advantage of them. And that’s what you want from a quality company.
Most of the stocks in the Bottom 25 are there for a reason. These stocks are counting on only the good times – cruises, air travel, resorts, high oil prices, consumer purchasing. When the good times come to a complete halt then it comes crashing down. I suspect the next recession would have beat these stocks down anyway because they need people feeling confident to spend money.
But Mr. TLR, Warren Buffett invested in Delta Air and Occidental. Well, I’m a fan of Mr. Buffett’s investing style but that doesn’t mean I want to own every stock he buys. In a surprising move, Mr. Buffett just sold some Delta and Southwest air a couple weeks ago (after the beatdown). Even he was caught off guard by this event.
Notice the absence of certain industries? We don’t see consumer staples or healthcare in the Bottom 25. That’s a good sign that necessary services or items that people are sure to buy over and over again are good to have in your portfolio. I call these “repeatables.” When companies make items that customers needs regardless of conditions then you get the potential for consistent earnings.
Bottom Line: None of the Bottom 25 stocks are on my Master Stock List. Sure, my Exxon and Royal Dutch Shell have taken a beating but they are well positioned to outlast the downturn. Quality, regardless of sector, is always good to hold in a portfolio.
Summary
Here are some basic learnings: (1) don’t chase performance of “hot” stocks, (2) don’t buy junk just because it appears cheap or low in price, (3) quality companies are critical to provide comfort during good times and bad, (4) develop a portfolio plan and adhere to it, (5) think long-term, and (6) own companies that make necessary repeatable products that customers want/need.
It can be tempting to see what is hot (or not) and buy those companies for your portfolio. When we are looking at companies, the lens has to be seen as what would happen to them in both good times and bad.
Thanks for reading!
Mr. TLR