Building a long term share portfolio is a lot like coaching an AFL footy team. Stock selection is all about the right companies, playing the right roles and in the right positions.
A lot of people have trouble knowing how to build a strong portfolio of shares and I often explain it using the AFL analogy. The penny seems to drop and becomes a lot clearer.
So with Footy Finals getting to the business end, I asked the expert panels I use on my daily investment program The Call (midday AEST on www.ausbiz.com.au) for suggestions for an All Australian Share Portfolio. I asked them to keep to the principles of AFL and the key positions.
Now I should preface this by saying every investor is an individual and you must seek your own individual independent advice before buying any shares. The following is purely an exercise to show you how to build a portfolio AFL-style.
In AFL the backline is that last line of defence to protect your goals when the play is moving against you.
When it comes to share investing defensive stocks play a similar role. They are the quality companies which provide stability when momentum has changed and the rest of the market looks a bit uncertain or soft. They are your longer-term defensive foundations.
The backline selections could be:
Aristocrat: The poker machine manufacturer could be excluded from some portfolios because of ESG concerns. But it has been a favourite foundation stock for many investors because it always delivers on expectations. The move into online gaming has also produced strong cash flows.
CSL: The old Commonwealth Serum Laboratory, CSL is a global health care stock in the blood plasma collection and processing business while also manufacturing flu and other vaccines. Double digit shareholder returns over many years has cemented CSL as a great defensive stock.
Washington H Soul Pattinson: Don’t be deceived by the name sounding like a chemist chain, Soul Patts is basically a listed investment company with a portfolio which includes Brickworks, coal miner New Hope and a list of other blue chip stocks. It has shown consistent shareholder returns over many years.
Endeavour Group: The hotel and liquor group, spun out of Woolworths into a separate listed company, includes a portfolio of hotels and bottle shops with the jewel in the crown being Dan Murphy’s. No matter how bad an economy gets people still eat and drink.
BHP: Australia is a huge commodities producer and resource stocks dominate our share market. BHP has always been the cornerstone of the sector and is an attractive dividend play – this year’s total dividend payout was the second biggest in the world behind Microsoft.
In AFL, the midfield are the fast nippy blokes who can ignite a team. They play a pacey high risk game which can lift a team when they’re “on song,” but can cause problems when they’re out of form.
In the sharemarket game, these are the companies which provide the flair. The stocks which can give a portfolio some real momentum.
The selections are:
Audinate: Developer and owner of the Dante protocol which has become the global standard in audio connecting to video. It controls 98 per cent of the global market and is used by all the major audio device manufacturers, so it therefore has a massive “moat” against any future competition.
Lovisa: Would be this year’s Brownlow medallist of retailers. The affordable jewellery retailer has completed a massive rollout of stores in Australia and is now successfully taking its formula overseas.
Elders: Is like an agricultural investment company, owning everything from farms and grain handling to rural real estate and financing. If you believe food is going to be a powerful investment thematic over the next few years, Elders has you covered.
Pilbara Minerals: As an essential ingredient in the manufacture of batteries for electric vehicles, lithium is hot at the moment. But Pilbara is one of the few actual lithium producers rather than an explorer promising big things in the future… Pilbara is making money now.
Goodman Group: Regarded as a premium property developer with flair. Sidesteps concerns about how office developers will fare in the new flexible work environment as Goodman plays in the industrial property space, building warehouses for the likes of Amazon.
The forwards have to be consistent performers, but there needs to be a mix. The monster which provides the target surrounded by a group of small forwards who provide the flair and run off the big guy. It’s the same in a share portfolio.
Woodside: The monster (think Buddy Franklin) of the energy sector. After purchasing BHP’s oil and gas assets, Woodside is now a global top 10 producer. If you think energy prices are going to stay high for sometime (as many analysts believe) then Woodside is set to be a major beneficiary.
REA: The real estate marketing platform dominates the sector in Australia and has expanded globally, with India seen as having massive potential. Even when property is in a downturn REA still does well, as vendors pay for premium positions to improve the sales potential. A second monster in the forward line (think Jarryd Roughead).
Whitehaven: There is a theory that coal is a broken commodity in that no new coal mines will be approved by governments or financed by banks. So as demand and prices stay strong for thermal coal, before the decades-long transition to renewable energy, there will be no new supply coming on stream to bring prices down.
Cochlear: The bionic ear manufacturer which sells products around the world has been attacked by new competitors in the past, but none have proved to be a significant threat. Still has a stranglehold on the market.
Substitutes in AFL are used to replace a player who is injured or out of form. They’re meant to plug a hole.
Premier Investments: Well-managed retail investment company which will benefit from uptick in consumer spending. It owns brands like Smiggle, Just Jeans, Peter Alexander and Portmans, plus has a significant stake in kitchen appliance manufacturer Breville. Could rotate in for Lovisa.
Mineral Resources: A mining company which is a major iron ore producer but more recently has become a significant lithium producer. A natural rotation with Pilbara Minerals.
Resmed: A leader in the manufacturer of sleep apnoea machines and hospital ventilators. Its the third leg of Australia’s global health care triumvirate (along with Cochlear and CSL) and could easily come off the bench for the other two.
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