When buying stocks, one key factor is diversification. If you have three or four favorites in one industry, it isn’t wise to buy all of them, because if an industry takes a downturn, many of the companies within it can be punished regardless of individual performance.
Study your favourites, and choose one that has the best prospects. One industry, one company for your portfolio.
Another kind of diversification is by stock category. Like individual personalities, companies can act in different ways. A steady earner, a fast grower, a cyclical, and a company with international exposure can spread out the earnings potential, so when one or two of your stocks aren’t doing so well, another can bring in a good return.
These four stocks all have good potential and good category diversification.
Macquarie Group Ltd (ASX: MQG)
The investment bank is getting its mojo back. It’s ready to take on more IPOs and mergers and acquisitions. It’s also expanding into home loans, to take advantage of the growing property market. Earnings were up $110 million to $872 million from $762 million in 2012, and the past 5-year total shareholder return is 21.3%.
Drillsearch Energy Limited (ASX: DLS)
This oil and gas explorer and developer has assets in the Cooper-Eromanga basins in QLD and SA. It’s teaming up with Santos Limited (ASX: STO) to develop wet gas and unconventional gas sources.
Production was up 173% from 2012, with 1.1 million barrels of oil equivalent produced. That sent NPAT from $9.9 million to $54.3 million. The company estimates that gross profit for 2014 will be around $90.5 million.
Ramsay Health Care Limited (ASX: RHC)
This private hospital operator in Australia, Indonesia, the UK and France has steadily been growing earnings since 2005. It has been patiently acquiring businesses, like its most recent purchase of the Medipsy business in France.
Healthcare is a defensive play and with the overseas diversification, it has a stable base to keep on growing. NPAT is up 31.5% over the past two years, from $222.5 million to $292.8 million.
Boral Limited (ASX: BLD)
The largest building and construction materials producer in Australia will benefit from a property market cycle turning up. Gravel, sand, rock, and cement are all its products that are necessary for construction. An expanding economy spurs on development, so it’s best to catch that growth when it’s first starting.
Housing construction had an upturn in 2012, and though property sales may be in the news a lot these days, a steady increase in construction of new houses and apartments has only begun in 2013.
For diversification, we don’t want things so spread out that each good stock is negated by one bad one. This leaves our total return weak or flat. Industry diversification is needed, but consider each stock carefully, and see how it matches up with what you already have.