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10 Stocks to Get You There
For retirement, you should pick only
stocks you can fall in love with.
Nelson D. Schwartz
Okay, everyone is thrilled that the S&P 500 is up more
than 20% for the fourth year in a row. The stock market
is topic No. 1 on commuter trains, in company
cafeterias--even at summer barbecues and between
innings at Little League games. But the question that
keeps buzzing around all these conversations is, How
much higher can it go? There's a palpable fear that the
long-term scenario won't always be so rosy, and this can
produce a lot of angst if your investing goals are long
term--especially if you're thinking ten, 20, or even 40
years out toward retirement. As the table at right shows,
the future worth of your retirement nest egg will be
hugely affected by the market's path.
For investors thinking ahead, the summertime anxiety is
well founded. If there is one thing that just about
everyone on Wall Street agrees on, it's that we can't
expect the record pace of the 1990s to continue
indefinitely. Over the past 70 years, stocks have risen by
an average of roughly 11% annually, and even rather
bullish strategists like Merrill Lynch's Rich Bernstein think
long-term results will inevitably return to the
neighborhood of 10% to 15%--not bad, but a far cry from
the 23% annual gains during the past four years. Other
observers, like Vernon Winters, the chief investment
officer for Mellon Private Asset Management in Boston,
are much less optimistic. "We'll have to live with modest
results," says Winters. "If bonds are only going to yield
5%, we can only expect to get 7% or 8% out of equities
over the next ten years."
Will future decades' returns be merely not so fat, or truly
lean? No one knows for sure. But smart individual
investors can map out a route that will keep driving them
toward their retirement goals no matter how the overall
stock market dips and turns. You should begin by ignoring
all the day-to-day buzzing about the bull market. Those
talking heads on cable TV and the frenzied back-and-forth
of the Internet chat rooms have everything to do with the
market's next zig or zag and mean nothing for those with
long-term goals.
The most important step you can take is not to rely on
"the market" to provide for your retirement all by
itself--by blindly stashing money in your company 401(k)
or an index fund. Instead, you can put together a portfolio
of stocks that should markedly outperform the broader
market--shares of companies whose earnings are rising
faster than average and that are big enough, solid
enough, and resilient enough to withstand the ups and
downs and still be there when you need them. They are
stocks you don't merely like or find intriguing: They are
stocks you can fall in love with.
The hard part, of course, is finding these lust-worthy
names. To guide our search, we talked to some of the
best stock pickers on the Street, such as Morgan
Stanley's Byron Wien. In addition, we picked the brains of
money managers like Conrad Herrmann of the Franklin
California Growth fund, who's scored 15%-plus returns in
flat and booming markets alike. Finally, we interviewed a
passel of analysts to determine whether our finalists had
both the earnings- and revenue-growth rates to deliver
double-digit gains over the long term.
You'll notice our choices share several characteristics. For
starters, they're all stocks with very large market caps.
This shouldn't really be a surprise. After all, it's the big
caps that have contributed a disproportionate share of the
huge gains of the '90s. During the past five years, the
S&P 500's 50 largest names have jumped by an average
of 26.7% annually, according to Salomon Smith Barney's
John Manley. The remaining 450 companies, on the other
hand, posted annual returns of 20.4%.
This outperformance isn't a coincidence. Since the
beginning of 1997, the 50 largest companies saw their
earnings grow more than three times as fast as those of
the rest of the index. And there's reason to believe this
pattern will continue. As State Street Global chief
strategist Jeff Davis points out, it's these very large
companies that can afford to make the kind of high-tech
investment that will boost productivity for years to come.
There's another trend evident from our selections--the
rise of the megamerger. Five of our picks are in the midst
of merging, and we think the cost savings and new
opportunities generated by those deals will be a major
profit source in the coming years.
You'll also notice that this portfolio has plenty of
international exposure. Although a big overseas presence
might seem worrisome in the wake of Asia's problems, it's
certain to be an asset in the long run. Overseas
economies--especially emerging ones in Africa and Latin
America--are likely to grow faster than the more mature
North American market. There's also a good chance that
growth in Europe will outpace that of the U.S., as the
Continent moves toward one currency and companies
restructure.
Remember, though, that this group of stocks still carries
some significant risks. In the event of a broad market
downturn, they will go down sharply with everything else.
And the high valuations of several of our
choices--especially the tech names--make them
vulnerable to any negative earnings surprises.
Nevertheless, the large size and dominant market position
of all our choices should limit the downside dangers.
Finally, we've included some alternatives to stocks that
are ideal for investors who are hungry for interest income
but wary of outsized risk. Now, on to the picks.
Recommending companies whose brands are household
names seems pretty obvious--maybe a little too obvious.
After all, the term "brand" is probably one of the most
overused business terms today, with everyone from
septic-tank cleaners to New Age healers claiming to
possess "brand equity." The fact is that only a handful of
brands have real power, and the companies behind them
have a long history of market-beating returns. |
