The recent volatility experienced throughout the market has highlighted the importance of maintaining a diversified portfolio, whereby all of your eggs are not put in the same basket, so to speak. A diversified portfolio can be thought of as a pyramid containing three levels. The first level is the core – a strong base to support the portfolio into the future. This level comprises large cash-generating companies that sustain competitive advantages and have more than established themselves in the business world. The second level is comprised of growth companies – those which have the potential to grow into market leaders…
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The recent volatility experienced throughout the market has highlighted the importance of maintaining a diversified portfolio, whereby all of your eggs are not put in the same basket, so to speak.
A diversified portfolio can be thought of as a pyramid containing three levels. The first level is the core – a strong base to support the portfolio into the future. This level comprises large cash-generating companies that sustain competitive advantages and have more than established themselves in the business world. The second level is comprised of growth companies – those which have the potential to grow into market leaders in their industries. Finally, the third (and largely optional) level is for speculative stocks – although these should only be purchased with spare, un-needed cash, as they very rarely pay off.
Here are 5 companies that would make for excellent additions to the first two levels of your portfolio:
QBE Insurance (ASX: QBE) is one of Australia’s top 20 companies by market capitalisation, and one of the world’s most profitable insurance groups. In recent years, the company’s value has been deflated significantly by the global financial crisis and numerous natural disasters. However, these natural disasters have allowed the insurer to increase its premiums which will result in higher revenue. Furthermore, whilst 25% of the company’s business is written in North America, the company will also benefit from the falling Aussie dollar. With a 3.2% dividend yield, QBE is a great company for your portfolio’s core.
Westfield Group (ASX: WDC) is another excellent addition to your portfolio. Westfield owns and operates over 100 shopping centres spread over Australia, New Zealand, the US and UK, and has ambitions to expand further into other promising markets, such as Brazil. The company is committed to returning value to shareholders through daily share buybacks, whilst they also focus on cleansing their asset portfolio by divesting in poor performing properties and expanding their most profitable. At $11.20 per share, the company is sitting around 10% below its 12 month high in May, and look set to continue as a dominant force well into the future.
NIB Holdings (ASX: NHF) is another provider of insurance products, covering areas such as health, life and travel insurance and offers insurance for foreign workers and exchange students at an increasing rate. Although the industry may not be expanding at an alarming rate, NIB’s business model looks set to deliver outstanding long-term results. Currently trading at $2.08 per share, it also offers a very attractive 4.8% yield.
Jumbo Interactive (ASX: JIN) is an online lottery business with plenty of potential. Whilst their endeavor began as quite speculative in nature, they have proven that they have the potential to take the industry to the next level. Over the last few years, Jumbo has expanded into several international markets, including the announcement earlier this week of a new deal with a major retail chains in the US, which saw their stock soar 17%. The major risk for the company would be that of new competition as well as stricter regulations being imposed for online gaming. At this stage however, their prospects look fantastic and is worth considering for your portfolio.
Cochlear (ASX: COH) is a global leader in the manufacturing of cochlear implantable devices for the hearing impaired. Although its share price has taken a beating in recent years due to a large product recall and an earnings downgrade, its superior quality over other brands should be enough to maintain and expand its market share. Compared to its price in January, Cochlear’s shares are trading at a 25% discount at just $61.95.
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Motley Fool contributor Ryan Newman owns shares in NIB Holdings out of the companies mentioned in this article.