Author: James Roberts
Covestor models: StockDiagnostics and Fortune’s Most Admired Companies
Disclosures: Long BLUD, HLS, LLY, KR, BH, ORL, UHAL, MCK, WLP, CAH, PKOH
In June, I became uncomfortable owning oil stocks, which are subject to the fluctuations in the price of a commodity. I have no crystal ball for anything, much less the price of a commodity. I hope that I can find companies whose success is attributable to superior products and superior management, rather than a broad-based increase in the price of a commodity. While both Chevron Corporation (NYSE: CVX) and Tesoro Corporation (NYSE: TSO) were rated highly by sources I trust, I decided to limit exposure to commodity based stocks.
Most of the stocks I purchased in June were defensive in nature. For example, a number were in healthcare related industries, including Immucor, Inc. (NASDAQ: BLUD), HEALTHSOUTH Corp. (NYSE: HLS), and Eli Lilly & Co. (NYSE: LLY). I believe that healthcare related stocks will outperform most stocks in a slowly recovering economy with a growing contingent of older people.
I would classify The Kroger Co. (NYSE: KR) as somewhat defensive because it is grocery that appeals to the budget minded consumer, who in my part of the country is attracted to some degree by the opportunity to purchase gasoline for less at Krogers.
Assurant is involved in insurance, including some health insurance and annuity products that provide benefits to fund pre-arranged funerals. Assurant is in a number of other insurance related fields as well, but I single these out as examples of recession resistant segments.
Biglari Holdings Inc (NYSE: BH) has been criticized for brashly copying the methods of Warren Buffett. I believe that is a plus, rather than something to be criticized. Biglari is a participant in the casual dining sector ,with its stakes in Steak & Shake and Ryans Family Restaurants. Positive changes have been made at Steak & Shake in reducing the cost of opening new stores. I expect Biglari to follow Buffett’s model by further diversification into businesses other than casual dining.
O’Reilly Auto Parts (NASDAQ: ORL) is another defensive company that benefits during times of economic adversity because people hang on to their old cars and some even start doing their own automobile maintenance. In this sector, it is difficult to decide whether AutoZone, Inc. (NYSE: AZO), O’Reilly, or Advance Auto Parts, Inc. (NYSE: AAP) is the best choice. O’Reilly has outstanding cash flow characteristics. Amerco (NASDAQ: UHAL) is somewhat defensive, in that it provides people an opportunity to do their own moving by renting a truck or a trailer rather than employ a professional mover. While there has been a decrease in the frequency of moves since the great recession, which will probably continue to impact the business, Amerco has another interesting business: its public storage facilities, which seem to be looking better.
Arrow Electronics was purchased because Stifel Nicolaus continues to hold the company in high regard and the portfolio needed more representation in the technology sector.
In order to increase the defensive nature of the portfolio, several additional healthcare names were added, including McKesson (NYSE: MCK), WellPoint (NYSE: WLP), and Cardinal Health (NYSE: CAH).
Park-Ohio Holdings (NASDAQ: PKOH) was purchased because I believe it is a good way to participate in the revival of the automobile industry. PKOH is primarily a logistics provider to the automotive industry. As the name suggests, the company is based in Ohio. One of the guidelines that the StockDiagnostics portfolio seeks to follow is investing in a substantial number of companies whose market capitalization is at or below $1 billion, as there is less research available on some of these names, which presents opportunities for research of our own. I believe that PKOH is somewhat neglected by brokerage house researchers. Consequently, my familiarity with the company could offer an informational advantage.
