Portfolio Protection in 2012

This was an up and down year -- but mostly down. Unfortunately, 2012 isn't shaping up to be any better. Investment strategists are saying the market might climb 20% higher. But let's remember one thing: it's their job to say things like that.

My job is to manage the Trends and Trades (TNT) portfolio (follow along on Twitter) and share with you what I'm doing. In 2012, I'll follow a simple, three-step plan to protect and grow that capital:

  1. Keep plenty of cash on hand.
  2. Find new ideas every week.
  3. Buy home-run stocks at attractive prices.

A cheap hedge
Volatility creates opportunity. And the only way to take advantage of opportunity is to have cash available to spend at a moment's notice. That's why I'm planning to start the year with 60% to 70% of the portfolio in cash. Having cash helps me sleep better at night. And I won't have to go through the difficult choice of selling one stock to buy another one.

Ideas to fuel the portfolio
Of course, sitting on cash without any stock ideas is like buying a car without a steering wheel. It's pointless, and you won't get anywhere fast.

Right now, I'm on a quest to learn about as many companies as I can. The more rocks I turn over, the better prepared I'll be when the market has one of its fits and offers a great company at an attractive price.

I recently highlighted five stocks with explosive potential. Two have made it into the portfolio. I'm going to look at five more today and give you an additional five at the start of the new year. Let's get started.

1. Fusion-io (NYSE: FIO  )
We live in a data-driven world. People want to access more data, more frequently, and to receive it faster. Fusion-io's hardware and software helps data centers meet those demands using "data decentralization." The idea is similar to just-in-time manufacturing: Rather than going to search for important, often-used data, it sits locally on a server. This speeds up performance and helps the servers run more efficiently.

Revenue is up almost 20-fold since 2009, and the company recently turned operating cash flow positive. Demand for its hardware and software will continue to grow. Fusion-io has a bright future ahead of it. I've put it on my Watchlst and recommend you do the same.

2. Zynga (Nasdaq: ZNGA  )
Zynga hit the social-gaming scene with a bang but came to the stock market with a whimper. CityVille, CastleVille, and FarmVille lead the way with the most daily active users, but investors turned their backs on the stock, sending it down on its first day of trading.

Maybe I shouldn't be surprised. After all, average monthly active user and sales growth have flattened out, according to the prospectus. But the people who continue to play keep spending money on virtual goods. (Zynga also generates money from advertisement sales and some subscriptions.) Will the growth resume? Zynga's management believes it will. It's investing more than $500 million to develop new and improved games for customers and expand its infrastructure, making Zynga one to watch in 2012.

3. Carbonite (Nasdaq: CARB  )
Keeping with the "data-driven world" theme, Carbonite wants to make sure everyone's data remains safe and sound. Our lives, after all, are on our computers. From memories to money matters, backing up our computers has never been more important.

Carbonite provides subscription-based backup services using its Carbonite Personal Cloud. For an annual fee, members can back up an unlimited amount of data. It's a simple and painless way to generate peace of mind. The company passed 1 million subscribers earlier this year, bookings continue to rise, and the company is generating cash flow. Is it safe to assume the trends will continue? We'll find out in 2012.

4. Jive Software (Nasdaq: JIVE  )
A new world of possibilities opens up as the way people connect and interact with each other changes. Jive is embracing that change by bringing the benefits of collaboration to the workplace. Think of it as the social media of the business world.

Whether it's employees collaborating on a new product or businesses interfacing with customers and partners, Jive is facilitating those connections. So far, 657 customers and more than 17 million users have jumped on the Jive bandwagon. They've been rewarded with fewer emails sent, an increase in online sales, and less customer support required.

Jive isn't stopping there. The recent IPO brings some strength to its balance sheet and gives it capital to improve its product and grow its business. I'm excited to watch Jive in 2012.

5. LinkedIn (NYSE: LNKD  )
Let's play a word-association game. Facebook is to social networking as LinkedIn is to … what? The answer is professional networking. And it's turning out to be very lucrative.

LinkedIn set out to change the way people work by "connecting talent with opportunity." There are an estimated 640 million professionals worldwide, and people create opportunities every day. No wonder LinkedIn has 135 million members and has generated $436 million in revenue over the past 12 months.

Is LinkedIn a TNT company? It has a transformational technology as well as nascent performance. The only thing left to do is determine whether it has a talented management team. But so far, LinkedIn looks like a TNT home run in the making.

Swing at fat pitches
I look forward to seeing whether the market offers up any of these companies as a fat pitch in 2012. They all have promising futures and plenty of potential. In fact, that's an important point. In a stock market full of volatility, we need to make sure there is enough return for the risks taken. The worst stock to put in a portfolio is one that offers return-free risk.

One such opportunity today is orthopedic surgical robot maker MAKO Surgical (Nasdaq: MAKO  ) . I've already outlined the case, for MAKO, so I won't rehash the details, but the market is offering me another chance to buy shares, and I'm taking it. I will put an additional 3% in the TNT portfolio.

My plan for 2012

I expect more of the same volatility in 2012 that we saw this year. That's why I plan to keep plenty of cash around, research lots of companies, and swing at home-run pitches in Trends and Trades. You won't want to miss any of the action. So make sure to get all of my updates, absolutely free, at Twitter.

Happy New Year!

David Meier is an associate advisor for Million Dollar Portfolio. He owns one of the stocks mentioned here. David Gardner and The Motley Fool own shares of MAKO Surgical, and Motley Fool newsletter services have recommended buying shares of MAKO Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 21, 2011, at 7:36 PM, Mega wrote:

    If you own any of those stocks, the best way to protect your portfolio is to sell them immediately.

    Rule Breakers and investors like them had an awful year, those of us with more conservative portfolios had a pretty decent year. Keeping 60-70% of your portfolio in cash and the rest in high risk, high valuation stocks is definitely not a proven strategy for long-term returns.

  • Report this Comment On December 22, 2011, at 8:52 AM, kariku wrote:

    I agree with MegaShort. Are you crazy recommending these stocks ?

  • Report this Comment On December 22, 2011, at 8:19 PM, chrisheck wrote:

    Gee, that's funny. I hold 10 RB stocks and I'm up 16% for the year.

    chris

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