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At Investing Club, we generally try to keep our portfolio around 30 stocks, give or take a few. We currently have 32. Anything much more than that becomes too cumbersome and prevents us from doing the daily homework required to manage a successful portfolio. In light of Thursday’s “Monthly Meeting,” we wanted to identify what we consider to be our 10 core holdings out of 32. Core holdings are companies we like long-term, because of their high-quality, best-in-breed characteristics. Here are some of the qualities we look for in a core holding company. The company must be the number 1 or number 2 operator in its industry. Great management teams with deep benches and a strong track record of creating shareholder value. Generating significant cash flows and strong balance sheets. A history of annual dividend increases and/or share buybacks that put money in shareholders’ pockets in the form of cash or appreciation. This list will, of course, evolve from time to time. Today, we may consider the stock to be key, but that could change three months from now. This is because our strategy is “buy and home” and not “buy and hold”. The latter is an old-fashioned, less rigorous way of analyzing stocks. With that, let’s dive into our 10 essential funds, listed in alphabetical order. The first is iPhone and consumer electronics maker Apple (AAPL). This has been our “own, don’t change” investment for years, and we see no reason to change that. Apple’s dominant hardware and growing service businesses provide deep competitiveness and connectivity opportunities. Its customer loyalty is unmatched, and it’s hard to find a product with a 98% customer satisfaction rating like the iPhone, according to the company. It’s no wonder the company’s installed base — the number of users who own an Apple product — is growing every quarter. But it’s not just the products that make Apple a great long-term investment. The company returns billions of dollars to shareholders each quarter through a dividend that has grown for 11 consecutive years, along with a share buyback program that reduces the total amount of shares outstanding. Next up is Costco (COST), the world’s best-run retailer. CEO Craig Jelinek and CFO Rich Galanti know how to run a business and do right by customers and employees. To understand Costco’s business model, it’s important to know that it’s not a margin company, it’s a high-volume company — and it turns a lot of inventory from a few units. Costco is also a subscription business, and renewal rates are at historically high levels right now because the value proposition in its warehouses is so good. It is the #1 place to buy groceries and goods regardless of economic background. On the horizon, we think it’s likely that Costco will dip into its cash soon and reward shareholders with a special dividend payment. That’s a nice bonus on top of Costco’s regularly scheduled quarterly dividend. Next year may also be the year when the company increases the membership fee. Some of those price gains may be reinvested in the business to keep prices low, but some should also go directly to Costco’s bottom line, improving earnings. A major leader in life sciences and healthcare diagnostics, Danaher (DHR) is a high-quality company led by an excellent management team, always looking for ways to create shareholder value. For example, management announced plans a few months ago to spin off its environmental and applied solutions unit, which provides instruments and software for testing water quality. This is a great benefit, but it’s a slower growing part of the business with a lower percentage of repeat sales at a lower margin. Getting rid of it could also bring in some cash, setting management up to make its next transformative deal. After this spin-off is completed late next year, the new Danaher will grow faster with very little cyclicality, and about 80% of revenue will be recurring, justifying multiple price-to-earnings growth. Management sees its core business post-separation growing in high single-digit revenue and double-digit earnings per share growth. Danaher is called an earnings compounder for a reason. Alphabet (GOOGL) is another name we consider a core holding. While the company’s ad business has proven to be more cyclical than previously thought, Google remains the go-to destination for online ads, with offerings that include search, email, YouTube, Maps and Android OS. When ad budgets begin to expand again, Google’s business will be on fire because it offers the highest return on investment for ad buyers. The company may be known for its search engine, but it has taken steps to diversify its business and become much more than pure advertising. Over the past few years, management has significantly stepped up its cloud computing efforts, and those investments are paying off in a big way. Google’s cloud business grew 38% last quarter and represents about 10% of the company’s total revenue. Now we want to be clear about something: Alphabet’s costs are currently too high, and the company needs to do more to better match cost growth with revenue growth. We think they’ll find religion, but until they do, the stock could be a little off. Now for the industry — Honeywell (HON). We’ve been rooting for CEO Dariusz Adamczyk for years, and it’s hard not to love his style. Over the years, he has shed underperforming auto and homebuilding businesses and doubled down on industrial software technologies. Current Honeywell has a lot going for it, with about 65% of sales focused on late-cycle end markets that can handle a softening economy. Aviation is still in post-Covid recovery mode with flight hours increasing and international travel gaining momentum. Oil and gas is an industry that continues to see investment spending, given elevated prices and an imbalance between supply and demand. Honeywell’s building technology segment is delivering consistent growth amid growing demand for so-called healthy buildings. With such a strong book of business, it’s no wonder Honeywell expects to deliver overall sales growth, margin expansion, adjusted earnings and free cash flow growth in 2023, despite the volatile business environment. Next up is healthcare company Johnson & Johnson ( JNJ ). We’ve mentioned often that J&J’s pharmaceutical business is growing faster than many of its peers and is on track to be a $60 billion business by 2025. And its medical technology business is about to accelerate after completing its $16.6 billion purchase of heart pump maker Abiomed. But what makes J&J a special name is plans to spin off its consumer products unit next year, to be called Kenvue. We think this break-up makes strategic sense, as two independent, market-leading companies will become more focused. Management will be able to move faster and deploy capital more efficiently while navigating various industry trends to meet customer and patient needs. Another pharma core is Eli Lilly (LLI). Eli Lilly represents one of the best long-term growth stories in all of pharma thanks to the success of its current product line and recent launches, minimal loss of exclusivity risk, a strong pipeline, and the ability to expand operating margins over time. About 70% of its revenue comes from 10 products that focus on diabetes — its specialty — as well as oncology and immunology, among others. Together, these 10 drugs increased sales by 18% year-over-year in the third quarter. Eli Lilly’s best-selling drug is currently Trulicity, which is used to treat type 2 diabetes, but over the summer it launched its next-generation version, called Mounjaro, and its success so far has been unprecedented. While the opportunity for type 2 diabetes is exciting, what’s most promising about Mounjaro is its ability to help adults fight obesity, for which it could be approved for treatment sometime next year. On the pipeline front, we remain encouraged by the work the company has done in the fight against Alzheimer’s disease and believe its treatment Donanemab could be a potential winner in the space. Moving on to financials, the next key holding is the bank Morgan Stanley (MS). We’ve long admired CEO James Gorman’s efforts to transform the firm into more than a typical investment bank, which can be cyclical and was a tougher business than a year ago. Morgan Stanley’s acquisition of online brokerage E-Trade and asset management firm Eaton Vance supports our view that the company is branching out from its traditional roots, raising funds to support a growing fee-based business. The bank is also one of the most reliable when it comes to returning cash to shareholders. The stock offers an excellent dividend yield of nearly 3.5%, and the bank has plenty of excess capital to buy back shares quarter after quarter, while other banks have paused their buybacks. Pioneer Natural Resources ( PKSD ) is an oil and gas producer with some of the best assets in the Permian Basin, along with high realized prices, low cash costs and the most attractive dividend yield in the S&P 500. Higher energy prices have tempted oil producers to “drill , baby, drill,” but this is a new era where manufacturers like Pioneer remain disciplined. Instead of spending more and flooding the market with new offerings, companies like Pioneer are focused on maximizing cash flow generation and returning that money to shareholders through dividends and buybacks. Pioneer prides itself on having a leading cash return framework, explaining why it returned 108% of third quarter free cash flow to shareholders. Last, but not least, is coffee retailer Starbucks (SBUKS). This is a company still in the early stages of the incredible reinvention plan devised by founder Howard Schultz. These investments will unlock efficiencies in its US stores by upgrading equipment and redesigning store formats to meet the growing needs of its loyal customer base. Outside the US, Starbucks is aggressively expanding its footprint in China, targeting 9,000 stores in the country by fiscal 2025, up from about 6,000 today. That’s a new store every nine hours for the next three years. The new CEO, Lax Narasimhan, was a solid hire, with nearly 30 years of experience in leading and advising global consumer-facing brands, including a successful tenure as CEO of FMCG group Reckitt Benckiser (RKT). (Jim Cramer’s charity fund is long AAPL, COST, DHR, GOOGL, HON, JNJ, LLI, MS, PKSD and SBUKS. See here for a complete list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive trade alerts before than Jim makes the trade. Jim waits 45 minutes after sending a trade notification before buying or selling shares in his charitable trust’s portfolio. If Jim was talking about a stock on CNBC TV, he waits 72 hours after issuing a trade warning before executing a trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY SHALL EXIST OR BE CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
A sign for Wall Street is seen with American flags in front of the New York Stock Exchange.
Yuki Iwamura | Afp | Getty Images
At Investing Club, we generally try to keep our portfolio around 30 stocks, give or take a few. We currently have 32. Anything much more than that becomes too cumbersome and prevents us from doing the daily homework required to manage a successful portfolio. In light of Thursday’s “monthly meeting,” we wanted to identify what we consider to be our 10 core funds out of 32.
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