3 Portfolio Moves to Make for 2012

I'll admit it. I am nervous right now.

Europe is moving closer to the edge of disaster as depositors are pulling money out of banks. The headlines talk about real estate bubbles and hard landings in China. U.S. unemployment remains stubbornly high while consumer confidence is still down in the dumps, adding fuel to the double-dip recession fire.

With little good news around the globe, I can't blame investors for continuing to pull money out of mutual funds. After all, the pain of The Great Recession and the 2009 crash still lingers.

What to do
What should investors do in this crazy environment, bury our heads in the sand and hope for the best?

Hope is not a good strategy. It's time to be realistic about the environment and plan accordingly. So here are three portfolio moves to make today -- and ones I am making in my Trends and Trades portfolio:

  1. Raise some cash.
  2. Define your strategy and the companies that match it.
  3. Buy them when opportunity knocks.

Let's break each step down and then see how they fit together.

Have some dry power
I've been on the market volatility bandwagon for more than seven months now. To take advantage of the market's swings, we need to have capital. So the first step is to raise some cash -- how much "dry powder" depends on your outlook and your personality.

Capital comes into my portfolio monthly. You can raise cash by cutting expenses, making a strong case for a raise, or even selling some stocks if needed. Either way, having cash today can pay big dividends tomorrow.

Know what you would like to buy and why
Having cash lying around doesn't do us any good unless we have a plan to invest it. I am on the prowl for home run investments. I am looking for companies that are taking advantage of strong trends and can grow for many years, even within a sluggish global economy.

I want to allocate 40%-50% of my portfolio to home runs, but I am in no rush to get there. I'll wait patiently for opportunities, researching lots of ideas. Last month, I highlighted 5 Stocks with Explosive Potential. I'm currently researching 10 new ideas and will share them, soon. Click here to follow the action on Twitter.

Buy stocks at attractive prices
With cash in hand and a list of stocks we like, the only thing left to do is buy shares when opportunity knocks.

I've purchased two of the five stocks mentioned in the article above: MAKO Surgical (Nasdaq: MAKO  ) , which you can read about here, and Zipcar (Nasdaq: ZIP  ) . Share prices have since declined, and Zipcar has fallen far enough that I am going to purchase additional shares.

Trends and Trades invests in companies with:

  1. Transformational technologies.
  2. Nascent performance.
  3. Talented management.

As you will read below, Zipcar possess all three of these qualities.

Transformational technologies:
 Zipcar didn't invent collaborative consumption -- trading, sharing, or renting assets rather than owning them. The company used passion and technology to become a leader in car-sharing in the United States.

Think of Zipcar as the Netflix (Nasdaq: NFLX  ) of automobiles. Rather than owning a movie, Netflix members pay a fee for access to one on DVD. Zipcar members, known as Zipsters, do the same with cars, paying a membership and a usage fee as well.

Whether it's a smartphone app or a key card, using a Zipcar is virtually painless. No wonder so many 18- to 34-year-olds are signing up for the service, which now boasts more than 650,000 members and 9,000 cars. According to CEO Scott Griffith, technology is the key to Zipcar's success:

... we continue to innovate the entire value chain, from developing award-winning websites and interfaces, to creating game-changing enhancements like two-way text, iPhone, Android and Facebook applications, to working with auto manufacturers like Ford (NYSE: F  ) and Toyota (NYSE: TM  ) to more closely integrate their vehicles into the space.

Zipcar vaulted to the lead of the industry, and further innovation -- like its Zipvan service or partnerships with apartment complexes -- will keep it there.

Nascent performance:
Being a leader is one thing. Generating profits for shareholders is another. Critics point to Zipcar's lack of profitability as a key risk. They're not wrong. I just think they're short-sighted.

Zipcar turned its first quarterly profit in September, as sales increased faster than SG&A expenses during the third quarter, 24% versus 16%. Griffith sees this as an important inflection point in the business, saying, "As Zipcar has reached scale, the economics and efficiencies of the model have changed, allowing us to be successful in smaller markets."

Today, Zipcar has a first-mover advantage over competitors like Hertz's (NYSE: HTZ  ) Hertz on Demand, U Car Share, and the recent partnership between General Motors (NYSE: GM  ) and RelayRides. Tomorrow, Zipcar can use its size and brand permission to stay ahead of the competition in the battle for the $10 billion global car-sharing market. It won't be a smooth ride. But if the company meets its sales and margin targets, Zipcar could be worth $2 billion to $3 billion in five years.

Talented management:
I recently asked Motley Fool co-founder David Gardner how he identifies innovative management. David said he looks for companies that redefine traditional industry metrics.

Zipcar's management switched from looking at revenue per member to revenue per car per day. And what a difference it has made on profit margins. Focusing on the productivity of the cars rather than separating a member's cash from his or her wallet helps manage the fleet more effectively. Management can see if members want to use the cars (they do) and if the cars are profitable (they are). I am confident management is steering Zipcar in the right direction.

It's time to buy more
As I said at the beginning, I am nervous about the future. Other investors are, too. The uncertainty is causing people to sell stocks. But as Warren Buffett said:

The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.

Zipcar continues to move forward even though its stock price has been going in reverse recently. The company is the leader of the car-sharing charge and poised to deliver explosive performance over the next five years. Shares trade at an attractive price, offering substantial reward for the risks taken. It's time to buy more, and I'll be bringing my allocation up to 10%.

In December, I'll be sharing more of my watchlist ideas, buying more stocks, and setting my portfolio strategy for 2012. Stay on top of all the action by clicking here to follow me on Twitter.

David Meier is an associate advisor on Million Dollar Portfolio. He does not own shares in any of the companies mentioned. The Motley Fool owns shares of Ford, Zipcar, Hertz Global Holdings, and MAKO Surgical. David Gardner owns shares of Ford, MAKO Surgical, and Netflix. Motley Fool newsletter services have recommended buying shares of General Motors, Zipcar, MAKO Surgical, Netflix, and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 16, 2011, at 2:08 PM, DanielCole wrote:

    Interesting points. I will say however that what GM has done in partnering with Relay Rides should indicate a forward thinking management team rather than an effort to catch up with Zipcar. They are supporting the collaborative consumption trend in an unprecedented way beyond what Zipcar has done. Zipcar is really just a streamlined Hertz whereas Relay rides is a peer to peer rental service. GM is not trying to be zip car, they are looking ahead 10 years when individuals rent their own cars and supporting that effort.

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