America's Favorites

04 May 2006

America’s Favorites

There’s an old saw about a real estate broker making his pitch in one of the ritzier Connecticut suburbs who stressed that the house he was trying to sell, was in the ‘right’ neighborhood, close to New York City, the financial capital of the world, with excellent country clubs, lots of financial types, and from the house one could even see the marina and all the stockbrokers’ yachts.  “Where are the customers’ yachts?” wondered the prospective buyer.

 

Surely, Greenwich, Connecticut is one of America’s favorite suburbs.  Good houses in good neighborhoods across America have increased quite nicely for the last few years, and I would venture that if you bought one five years ago, you can sell it today for a nice profit.  What about the other important asset class – your stock portfolio?  The economy has been strong and the market, after the 9/11 sell-off has recovered.  Inflation is low, unemployment is down, and although rising recently, interest rates remain benign.  Earnings are robust for America’s corporations. 

 

The New York Times publishes a chart – THE FAVORITES: Stocks held by largest number of accounts at Merrill Lynch.  As Dallas is America’s team, these are America’s companies, and Merrill is surely America’s stockbroker.  There have to be a lot of these FAVORITES in a lot of those accounts at Merrill, at the other major brokerage houses, and in your mutual funds.  We are talking American Telephone & Telegraph, Chevron, General Electric, IBM, Verizon, Time Warner, Microsoft, Cisco, and the like. Portfolio stalwarts admired for their global franchises. Don’t leave home without them. Fifteen of these twenty companies have increased earnings for the last five years, and seventeen for the last three years.  So what’s not to like – great companies, up earnings. Using Merrill as a proxy for our large stockbroker community, these favorites almost certainly dominate the portfolios of a multitude of America’s shareholders.

 

We have a client whose total portfolio consists of one of the better of the FAVORITES, General Electric.  Despite our urging, he has made no change in years.  GE is a great company.  It is one of the largest and most diversified industrial companies in the world.  Since 1995 earnings have increased every year, and twenty-three analysts are on record predicting an increase in 2006.  Dividends have steadily grown.  Of the twenty-three Wall Street experts who follow the stock, there is not one who recommends selling it.

 

We have to make an assumption here that the FAVORITES are the type of stocks that are placed in portfolios ‘for the long term’, and that our client with his GE is not an exception in his love and devotion.  An owner feels safe with these names.  Brokers feel secure in recommending them.  They do take up a lot of space, though, and crowd out alternative investments.  They are comfort stocks.  So how comfortable have you been?

 

While fifteen of the FAVORITES increased earnings, as of our review on April 18, 2006,only seven of the twenty had share prices higher then they were five years ago.  For the mathematically disadvantaged, thirteen of these great companies that are held in the largest number of accounts at our largest stockbroker were worth LESS than they were five years ago.*  GE reached its peak in 2000 at almost $64.  As of this writing you can buy it at about half the price, $34.  Buy high, to have and to hold ‘til death us do part.  It is true you could see the $60 again, but how long will it take?

 

Oil has increased from $20 a barrel five years ago to over $70 per barrel today; that is, 250%.  Two of the seven ‘winners’ are oil companies, but a close look shows that Chevron, up 44%, and ExxonMobil, truly the gold standard for energy companies, is up 46%.  Not bad, 9% a year on average, but rather puny when compared to the 250% increase in the value of their product.  The AMEX index of international oils has increased 100% in the same five years.  Other commodity companies, such as International Nickel, have increased 200%, Phelps Dodge – copper – 350%, Newmont Mining – gold and silver – 200%.

 

Two points here – one, take out two of the FAVORITES whose commodity product is up 250%, both of which have lagged the composite of comparable oils, and you only have five of twenty with higher prices, and, secondly, their stock appreciation does not hold a candle to other commodity stocks.

 

Of the five whose values have increased, one is Avaya (whatever an Avaya is) and it is up 6% in the five years, an average of 1.2% per year.  The others are Bank of America – up 100%, Johnson & Johnson, up 11%, Microsoft, up 26%, and Proctor & Gamble, up 43%.  The following chart should give a clue to where the yachts are.

 

 

So, what about ‘the market’ for the last five years?  The market as measured by the S&P 500 was basically flat for this period of time.  In the last two years, the S&P is up about 16%.  Only three of the twenty favorites bested this Index, and this included the two oils that were lousy versus their sector.  Using poetic license let’s call it one of twenty.  That is, on a relative basis, only one FAVORITE compared favorably.

 

As of April 30, 2006, the Tocqueville Fund, which is a good proxy for our managed multi-cap portfolios, increased 59.4% for five years and 41.5% in the last two.† Our Investment Philosophy is conservative, and emphasizes preservation, as well as growth of capital.  We emphasize a three to five year holding period and stock selection.  Almost by definition we avoided America’s favorite stocks.  Our approach is to bet against the consensus.  But recently, the poor long term performance of these favorite stocks coupled with their strong and improving fundamentals has caught our attention.  Overpriced and over owned, they were a poor place to invest your money five years ago. Five years from now, they might help you afford that home in Connecticut complete with a yacht.

 

 

 

 

R. James Thornton

Senior Portfolio Manager

Tocqueville Asset Management

 

4 May 2006

 


* On May 2, 2006 JP Morgan Chase Co closed at $45.50, ten cents above the December 31, 2000 closing price.  All of the other FAVORITES still lag their December 2000 performance figures.

 

† Average annual returns as of 3/31/06 for the Tocqueville Fund are as follows:  1 year:  20.83%; 3 year: 28.04%; 5 year:  11.04%; 10 year:  10.86% and since inception on 01/31/87:  11.33%.

 

Performance and data quoted represents past performance and does not guarantee future results.  The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.  Fund performance current to the most recent month-end may be lower or higher than the performance quoted and can be obtained by visiting our website, www.tocquevillefunds.com, or calling 1-800-697-3863.  The above figures assume reinvestment of capital gains and dividends and are not intended to imply any future performance.

 

This is not a solicitation or offer of the Tocqueville Fund, which may be made only by prospectus.  The prospectus contains essential information about the fund and you should read it carefully before investing.  You may order a copy by visiting our website, www.tocquevillefunds.com, or calling 1-800-697-3863. Tocqueville Asset Management L.P., their affiliates and their officers, directors, employees, advisors or members of their families as well as the clients for whom they manage portfolios; 1) May have positions in securities or options of issuers mentioned herein and may make purchases or sales of the securities or options while this publication is in circulation; 2) May hold directorships in corporations discussed in this publication.  The opinions expressed in this document are those of Tocqueville Asset Management as of the date of the writing and are subject to change.