Take a portfolio whose default risk is virtually zero. Its weighted beta is 0.72, which is not particularly high. The investment period is five years. No lock-in period. These are the portfolio’s components: ARM Holdings (LSE: ARM), Diageo, SABMiller (LSE: SAB), BP (LSE: BP), National Grid (LSE: NG) and ASOS (LSE: ASC).
25% ARM
ARM stock has dropped 18% so far this year. Uncertainty still surrounds the outlook for growth in tech-land, but ARM boasts a strong foothold in the fast-changing smartphone market, and is net cash, which signals a strong balance sheet.
Admittedly, it doesn’t come very cheap. As I recently argued, however, if management deliver on their promises and trading multiples revert to mean, then the upside could be 20% or more. Key to ARM’s success will be how fast managers react to shifting consumer preferences. It remains a takeover target.
12% Diageo & 18% SABMiller
Neither stock has performed well in the last year or so, but very little could go wrong with these two businesses. In the last five years, Diego has outperformed the benchmark index by 67 percentage points, excluding dividends — while SAB has fared even better.
Their payout ratios aren’t incredibly attractive, but their hefty operating margins, strong fundamentals and manageable debts are elements to like. Diageo and SAB are favoured by long-term trends in emerging markets. Extraordinary corporate activity supporting the shares of both companies shouldn’t be ruled out in the medium term, either.
30% BP & 10% National Grid
BP is a decent dividend play, and if it slims down quickly while preserving margins, its stock could certainly outpace the growth rate it has recorded in recent times. The macroeconomic outlook also supports a positive view on the oil behemoth. It must regain pride, but operationally the business is getting back on track.
National Grid, for its part, has a solid asset base. Its size and investment plans allow for an upbeat stance even when it comes to assessing leverage ratios that would not be considered acceptable for smaller competitors in the same sector.
5% ASOS
I recently said that “taking a bet on the online fashion retailer at £42-£45 would make a lot of sense for an investor whose portfolio is properly diversified.”
ASOS issued a profit warning last week, its second in three months. Its stock plummeted to a low of £28.3 on Thursday, yet it bounced back to close at £33.5 on Friday. It’s outperforming the FTSE 100 Index on Monday.
I reiterate my positive view on ASOS, because I believe the business is well positioned to grow and it could receive a blown-out offer given that consolidation is likely to speed up in the online retail sector.
