Just as there are different kinds of industries that we want to diversify amongst in our portfolio, we also want to make sure we have different types of companies. There are fast growers, slow growers, cyclicals and stalwarts. They act in different ways and smooth out the ups and downs of portfolio returns.
Here are four stocks that would represent each type for a sample portfolio.
Fast grower: Senex Energy (ASX: SXY) is a explorer and producer of oil and gas in the Cooper Basin, and has market capitalisation of $887 million. In addition, it is also developing unconventional gas like shale gas and coal seam gas, the same resources that are seen booming in the US oil and gas industry. Now that increased production and revenues are being achieved, earnings after tax went up 588% from $8.8 million to $61 milllion. Price-earnings (PE) ratio is 14, share price $0.77.
Slow grower: Slow yet stable in growth, National Australia Bank (ASX: NAB) currently offers the highest dividend of the Big Four banks at 7.06%. The slow grower may not shoot up in share price overnight, but dividend adds to the total portfolio return, and keeps chugging along. Its PE is 15 and share price is $35.97.
Cyclicals: These stocks go from up to down over a number of years in a rhythm with their industry. The housing industry is coming out of its GFC funk, so Mirvac Group (ASX: MGR) is beginning to move with higher revenue and earnings, although it did have a $241 million write-down in 2013. When property values go up, it will see better profit margins with higher sales volumes. PE is 16, share price is $1.76.
Stalwarts: Not fast growers nor flat slow growers, these are usually market leaders that have become so big they can only grow as fast as population growth. Wesfarmers (ASX: WES) fits the bill here with its Coles, K-mart, Target retail brand names that are at every shopping mall. It is also involved in agriculture, coal, and insurance. Profit margins are only 3.8%, but the sheer volume of sales keeps it growing and expanding. It has a PE of 21, and the share price is about $42.
The Foolish Takeaway
It is said that diversification is the only free lunch in stock markets. It doesn't cost you anything more to do, but it helps protect you from the inevitable market sell-off. Not only owning a variety of industries in your portfolio, know the kind of stock each company is so that you can achieve balance and steadier earnings.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
