|TheStreet.com, Spring, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
NEW YORK (TheStreet) — With the S&P 500 delivering its best first-quarter return since 1998, there’s a growing concern, in my mind anyway, over the sustainability of this rally due to the approximately 15% contribution made by just one stock, Apple(AAPL).
If you have been long AAPL, cheers. (If you are short, I just don’t know what to say to you.) The company has far outpaced the overall market, gaining nearly 50% year to date. This has contributed an outsized 1.75% of the S&P’s roughly 12% price return.
If you were to strip Apple from the S&P 500 and eliminate its future earnings forecast, full-year 2012 earnings revisions for the S&P 500 would be 40% lower. This hasn’t happened since 1999 with Microsoft(MSFT) and the tech boom, and we all know how that ended.
It’s important to take note of how Apple today is different from Microsoft 15 years ago. The multiples tell the story. The S&P 500’s trailing price-to-earnings ratio (P/E ratio) is just under 14 times, compared with approximately 27 times in 1999. OK . . . Also Apple’s trailing P/E is about 17.5 times , compared with MSFT’s 70x in 1999. So while these numbers give comfort, smart investors should carefully review their portfolio holdings and consider making some changes as we head into the second quarter of 2012.
As our markets keep climbing the “wall of worry,” we are taking the opportunity to review all of our equity portfolio holdings — mutual funds, ETFs and individual stocks. As we move into the second quarter, we want to own size and strength. And we are looking to own shares of companies with the following characteristics.
Must have a strong balance sheet
Must have strong revenue growth, both relative to its peers as well as its benchmark index
If the investment falls into our income-and-growth strategy, we insist on a history of consistently rising dividends and the cash on hand to continue to do so. If the investment falls into our growth-and-income (with more emphasis on growth) or pure-growth strategy, we insist the company has above peer group operating and profit margins.
Strong international expansion and overall business growth
Three big names we have purchased in the pursuit of this strategy are Starbucks(SBUX_), Google(GOOG_) and CVS Caremark(CVS_). They meet all of the above criteria, and then some.
Google, in our view is unassailable for the foreseeable future. Starbucks is the de facto brand for high-end coffee and is making moves to get into your kitchen. Finally, we believe CVS offers investors a hedge against the disruption of Obamacare. We think it will win either way, with more immediate upside should Obamacare be declared unconstitutional.