10 Stock Picks For Your Long Term Portfolio

A little bit Investing, A little bit personal

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You have saved a few pound, and keeping all your cash on deposit for 0% interest while global banks flirt with bankruptcy is starting to sound less appealing by the day.

Sound familiar?

You have a few options here.

• Put your money in a high-interest savings account like Trade Republic (low-risk)

• Purchase some short-term Treasuries (low-risk)

• Invest in a Money Market Fund (low-risk)

• Create a diversified ETF portfolio of Stocks and Bonds (Medium Risk)

• Hand-pick a concentrated portfolio of companies you like (Medium / High Risk)

• Yolo trade on options and crypto – (You'll probably lose everything, but you will have tons of fun in the process)

For today, Let's focus on hand-picking stocks.

Stock Picking

I feel compelled to heavily caveat this whole piece before I even start. People are convinced that because I do this for a living, every stock I pick must go up in value immediately (THEY DO NOT).

I remember giving a buddy of mine the name of a company I was watching (that I hadn't even invested in), and he went off and invested no more than 100 quid in what he blindly assumed would be his golden ticket. The company proceeded to fall about 40%, and the man hasn't shut up about his missing $40 since.

In reality, I am right slightly more than I am wrong, and things have worked out well because a handful of big winners is all you need to tilt the odds of success in your favour.

7 Questions to ask Yourself before Buying a Stock

When it comes to investing, nothing is certain. There are no perfect stocks to buy because there's no way of predicting the future with 100% accuracy.

The truth is, investing is hard, and building a portfolio of top stocks that beat the market is something that even financial professionals have trouble doing consistently.

In fact, after fees, only about 11% of actively managed funds outperform the S&P 500 over a significant period of time.

For most people, investing in index funds is the perfect hands-off approach, providing broad exposure to the stock market at a very low fee. Even my own personal portfolio is made up of roughly 70% ETFs despite the fact I invest in the market for a living.

But I believe some stock picking is a good strategy for many hands-on people for a number of reasons. 

1. Taking a small portion of your overall portfolio and diligently selecting a small number of companies to invest in gives you an opportunity to learn about the investing process and fully understand the businesses you are investing in, which helps to build conviction in your positions.

    

2. From a phycological standpoint, "collector's instinct" kicks in, enabling people to actively participate and consistently invest more money over time.

    

3. Lastly, for Irish investors, there are tax benefits to consider. If you invest in individual stocks, you are taxed at the CGT rate of 33%, and the first €1,270 of your gains are exempt from CGT each year. When investing in index funds or ETFs, you are taxed at the exit tax rate of 41% with no annual exemption.

For those interested in picking individual stocks, here are 7 questions you should ask yourself before investing in any company.

1.  Do I understand the business?

    

   Too many people invest in businesses they don't understand because it 'sounds good'. If you have no idea how the company works, you won't have the conviction needed to hold onto the stock when an inevitable downturn comes.

    

2. Can the balance sheet withstand severe, temporary pain?

    

   This seems obvious, but so many people invest in companies without understanding how much money a company holds and who they owe money to. Economic cycles are guaranteed. Things can get very hairy very fast if a company is running large amounts of debt on tight margins. You must ensure the company has enough cash on hand to remain solvent when activity slows.

    

   A - Analyse the Current Ratio and Debt/Equity. These will give you a quick overview of liquidity and leverage within the company.

    

   B - Take a look at the company's operating statements. Have the costs of running the business changed? If costs are going up while the company's sales are not, it may be a warning sign.

    

3. Will the company benefit from long-term trends?

    

   Make sure the company will remain relevant into the future. If the stock is cheap now, it may be cheap for a reason.

    

4. Is the company enjoying profitable growth?

    

   Not growth at all costs, but a combination of sustainable growth and value.

    

5. What are the risk factors?

    

   Is the company trying something new and untested? If yes, who are its competitors, and how successful are they? If other players are more established, this company may have a tough time breaking into the market.

    

6. Does the company have strong insider ownership or a history of long management tenures?

    

   You want the people running the business to have skin in the game.

    

7. Is the company trading at a reasonable valuation? This is undoubtedly the toughest question to answer.

    

   Start by comparing the company's valuation metrics against other top performers in their sector. Here are some of the most important ratios to consider in your comparisons.

   • Current Ratio

   • Price to Earnings Ratio

   • Debt To Equity Ratio

   • Return on Equity

   • Return on Assets

   • Return on Invested Capital

   • Free Cash Flow

All this information can be found online at sites like stratosphere.io.

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10 Stocks to Buy and Hold for the Long Term 

'Shut up about all the research we should do and all the risks involved…. just give us the stock picks….'

Here is a diversified list of large cap companies that should function as foundational positions in your stock portfolio.

1. Enterprise Products Partners (EPD)

Let's get straight to the point with this one. EPD currently has an 8% dividend yield and 24 years of consecutive annual dividend growth. I wouldn't class myself as a 'dividend investor' by any means but this one appeals to me.

• EDP operates a vast pipeline network that transports oil, gas, refined products, and petrochemicals in the US.

   

• Thankfully this is a pick-and-shovel play, so they have reduced exposure to commodity prices. They make money mainly via the transportation of the underlying commodities. However, prolonged periods of low energy prices can reduce production volumes, which eventually means lower volumes and lower revenue for transporters. Given recent adjustments in gas prices, this is a headwind..

   

• Rather than being merely an oil and gas play, their exposure to refined products and petrochemicals gives them strong future-proof growth, and resilience against changes in market conditions.

   

• This is an asset-heavy business with a lot of leverage. With that said, they have a long bond maturity profile and rather low-interest rates on primarily fixed-rate debt, so recent rate hikes shouldn't weigh too heavily on the bottom line for some time.

   

  2. JP Morgan Chase (JPM)

Yup, that's right. I'm suggesting you buy a bank during a banking crisis.

• Not a massive fan of banks from an investing standpoint, but in a bid to get broad exposure to multiple market sectors, I think JPM is worth including.

   

• In the wake of the recent banking crisis, I expect to see some consolidation in the banking system in the US as the focus turns to bank safety. Companies and high-net-worth individuals are fleeing regional banks and moving to the too-big-to-fail names. JPMorgan Chase is in line to collect a huge chunk of this newly available capital.

   

• This will be ideal timing for JPM, as there are finally opportunities to deploy money into this higher interest rate environment relative to the prior decade. With a widening net interest margin and an asset book that may generate some returns in the future, I expect JPM to continue leading the banking sector.

   

• Jamie Dimon has essentially become the overlord of the US banking sector, which should help.

   

• Risks: slowing economic activity, heavy regulation and the continued flight of capital out of deposits into money market funds remain the major risks here.

   

• 3% dividend yield is also nothing to be sneezed at.

  3. Home Depot (HD)

This is possibly a controversial call given the environment we are in but I think Home Depot has the potential to be a stable long term position at current valuations.

• Home Depot is the largest home improvement retailer in the world, having over 2,300 stores in all 50 states alongside Canada, Mexico, and three U.S. territories.

   

• A slowing housing market and the inflation impact on consumer spending remain the primary concerns. These concerns have been reflected in the share price, with the stock down almost 20% in recent months and down over 30% from all-time highs.

   

• With that said, Home Depot has been in operation for over 40 years and has a history of resilience. During the GFC, when the housing market effectively fell apart, Home Depot's stock price fell 5% while the broader S&P 500 was down 25% during that same 2007 to 2009 period. With a far less dramatic housing slowdown ahead, I expect Home Depot to weather this 'pending' storm.

   

• I believe the 'home improvement' trend will continue to grow as homeowners opt to do up their current homes instead of giving up their ultra-low mortgage rates in pursuit of a new home.

   

• Home Depot is also in a healthy financial position. Even if conditions deteriorate further, it has enough cash to maintain its debt obligations and dividends in the near future and is generating over $11 billion in free cash flow. Also, its price-to-earnings ratio is under 17, which is below the S&P 500 average of 19.

   

• Dividend of almost 3% is an added bonus.

   

  4. Berkshire Hathaway (BRK)

Just let Warren Buffet do your stock picking for you. Simples

• I will spare you the details on BRK as most are already aware of the successful exploits of Mr. Buffet. In short, it’s a great way to get diversified exposure to a wide range of companies by investing in one single company.

   

• While many are starting to speculate about Charlie and Warren’s potential immortality, some negative price impact can be expected when the 99-year-old and 92-year-old co-founders eventually make their move to the trading floor in the sky. Then again, I have been saying this for 10 years, so make of that what you will. I expect the company to function seamlessly once this happens, but the fandom around the company and the valuation premium will eventually fade away.

   

• Slowing economic activity will ultimately weigh on the company over the short term, but its long-term focus on value continues to play out over time.

  5. Shell PLC (SHELL.AS)

All the major oil companies benefited from the surge in oil prices, with Exxon, Chevron, Shell and BP all reporting record earnings last year. The question is whether the good times will last as oil prices 'normalise'. 

• In my opinion, 2023 growth certainly won't match what we saw in 2022. With that said, last year's energy crisis highlighted our huge dependency on oil and gas, despite progress in sustainable energy production. I expect this dependency to last for several years to come. A lack of investment in infrastructure and recent consolidation in the industry leaves a small number of large companies perfectly positioned to generate enormous cash flows going forward.

   

• European oil companies continue to trade at a significant discount relative to their US counterparts. Shell currently trades at a P/E ratio below 5, with the likes of Chevron trading at almost double that.

   

• Despite the stranded asset risk, Shell is making significant investments in sustainable energy as it transitions to a net zero emissions model. Shell invested about $3.5 billion in renewables and energy solutions business in 2022, making up about 14% of total capital expenditures. This will weigh on the bottom line over the short term but is vital for the longevity of the business.

   

• It's worth remembering that ESG is never as straightforward as they make it out to be. The villainous oil producers of the world are also among the leading investors in sustainable energy research and production.

   

• Stranded asset risk remains the overarching risk here, so advancements in renewables will need to be monitored over time.

• 4% dividend yield.

Ok this is already way longer than I intended it to be so I’m going to stop there and list 5 more next week.

To be continued…

They say you need to keep newsletters short and to the point, if you want anybody to read them, so each week, I set out to make this neat and succinct article.

Cut to a few hours later, and I have written 2,000 words, and I’m only halfway through.

Why am I like this?

It’s a work in progress, bear with me.

In the meantime, here are a few more of my recent article if you are interested.

The Irish Investment Market Is Pathetic

My Top 7 Investing Tips

4 Life Lessons since being Diagnosed with Rheumatoid Arthritis

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