5 Stocks to Add to Your Perfect Portfolio

Timing the stock market is a losing proposition. A much easier and proven way to make money in the market is as easy as cooking your favorite meal. By following a simple recipe you can not only create a tasty dish, but also a well-performing portfolio.

Dishing up a balanced portfolio
Studies show that 90% of variability in portfolio returns is derived from asset allocation, not market timing or stock selection. So while stock selection can make a difference over the long haul, higher-level portfolio decisions overwhelmingly dictate your results.

Benchmarks offer us guidance in structuring our portfolio, keeping risk in check and evaluating our performance over time. Benchmarking helps us make strategic decisions on sectors, while maintaining diversification, so we can manage risk appropriately. A properly benchmarked portfolio helps us mitigate uncertain market conditions since sectors perform differently over bull, bear, and flat markets.

Think of a benchmark as a set of instructions, like a recipe for cooking a meal. If you're preparing chicken curry, you know that chicken, spices, garlic, yogurt, and coconut milk are required ingredients. The recipe spells out the ingredient list and the quantity of each necessary for crafting a palatable dish.

We'll use the MSCI World Index as an approximate benchmark for determining how much of each sector -- or ingredient -- you'll want to consider for your portfolio.

Source: Industry weightings adapted from MSCI World Index.

The industry weightings provide you with a starting point for making decisions. If your stock portfolio carries the same weightings as the index, then you are neutral from an industry standpoint; you'll prepare your chicken curry as the recipe dictates. If you feel strongly about a particular industry and buy stocks only in that industry -- effectively overloading your dish with handfuls of spices -- then you take on more risk and potential reward.

Grab your apron or order out
Once you've determined your strategy, execute on it. One method is buying broadly diversified mutual funds or exchange-traded funds (ETFs), effectively procuring premade curry. For those who prefer take-out, broadly diversified ETFs like Vanguard S&P 500 ETF and SPDR S&P 500 ETF do the trick.

Or get in the kitchen and roll up your sleeves. You can screen for stocks based on predefined criteria, like valuation, or look for companies with sustainable competitive advantages. Today, let's take a look at some stocks to consider for the consumer staples and consumer discretionary sectors -- or ingredients -- mentioned above.

Consumer staples
U.K.-based Unilever (NYSE: UL  ) brings us brands including Dove, Axe, and St. Ives skin care products, Bertolli pasta and sauces, Lipton beverages, and Slim Fast meal replacement bars and shakes. This personal-care powerhouse with a market cap of $98 billion boasts a solid balance sheet that typically contains $1 billion of cash and $3 billion of annual cash flow. The company is expected to grow nearly 5% annually during the coming five years. And Unilever pays a stellar 3.9% dividend yield.

We know Tesco (NASDAQOTH: TSCDY.PK) here in the U.S. for its Fresh and Easy grocery chain. But even though Tesco is growing its U.S. and Asian footprints, this U.K.-based company derives most of its business from Brits. Tesco's largest shareholder, Warren Buffett's Berkshire Hathaway, owns 5.08% of company stock. While you shouldn't blindly buy a stock just because Buffett does, there are many compelling reasons you should consider Tesco, including its trailing P/E of 9.

Consumer discretionary
Starbucks (Nasdaq: SBUX  ) has a great product and a strong brand -- main reasons why millions of customers wait in long lines for customized beverages with names I can barely pronounce. Last year, Starbucks revenues grew 9% and net income grew 31%, while quarterly revenue and quarterly earnings grew 14.7% and 18.5%, respectively. Starbucks boasts solid return on investment and is expected to grow nearly 20% per year over the next five years.

Starbuck' growth initiatives include the recently announced $100 million acquisition of San Francisco bakery retailer La Boulange and a deal with Coinstar to sell Seattle's Best coffee in automated kiosks across the country.

Israeli company SodaStream (Nasdaq: SODA  ) is popping its way into the U.S. with its razors-and-blades model for at-home carbonated beverages. Wal-Mart started carrying SodaStream products in May and can't keep the shelves stocked fast enough.  SodaStream is expected to grow sales 30% annually over the next five years, mostly through growth in the U.S. It plans to bring SodaStream products to a wide variety of U.S. grocery retail outlets and drug stores in 2014.

Considered the McDonald's of Latin America, Arcos Dorados Holdings (NYSE: ARCO  ) is the world's largest McDonald's franchisee. The company boasts enormous growth potential. There are only 1,840 Mickey D's restaurants serving Latin America's 570 million people, compared to 14,000 locations feeding the U.S.' 312 million. Company revenues are expected to grow 24% annually during the next five years.

Foolish bottom line
Now that you're equipped with a recipe and know the type and quantity of ingredients needed, you can better evaluate stock ideas that come your way. Take a look at your stock portfolio and see how it stacks up. Then focus on finding great stocks in sectors that you are underweight.

We've looked at consumer goods companies in this article, but if you're interested in beefing up the tech portion of your portfolio, look no further. Our analysts uncovered one under-the-radar tech company whose clients include blue-chip bellwether Coca-Cola. The stock is highlighted in a free report, but it won't be around forever -- get your copy today.

Fool contributor Nicole Seghetti does not own shares in any of the companies mentioned in this article. She does enjoy fizzy drinks though. Follow Nicole on Twitter @NicoleSeghetti. The Motley Fool owns shares of SodaStream International, McDonald's, Coca-Cola, Berkshire Hathaway, Arcos Dorados Holdings, Starbucks, and Tesco. Motley Fool newsletter services have recommended buying shares of Starbucks, Tesco, Unilever, Berkshire Hathaway, Coinstar, McDonald's, Coca-Cola, and SodaStream, and have recommended writing covered calls on Starbucks. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 09, 2012, at 1:55 AM, MrSinnister wrote:

    When will Discovery Labs (DSCO) finally get some love? I mean they have 2 FDA approved products that go into distribution in the 4Q, with the FDA approval coming in March. They only have 43 million outstanding shares, with a current market cap of 125M which nearly multiplies with every 10 cent increase. They are going to distribute a drug for Respiratory Distress Syndrome for infants in the US and European markets, and they have TREMENDOUS upside, already up 60 percent on the year. Add to that two more drugs awaiting approval, Aeroserf, that is in a collaboration with Batelle to get streamlined and fine-tuned and Surfaxin LS, a liquid version of their already FDA-approved drug Surfaxin. How this stock stays in the 2 range is amazingly shortsighted.

    Value of Surf LS + Afectair: 275million

    Shares O/S: 43mil

    Tell me why we can't see $40+/share with DSCO. Note that my sell target is below this, but I expect the stock to soar once it gains momentum. Imagine that liquid surfaxin penetrates the market quickly and gets great reviews by practicing docs (which it should). Surf LS will be even better. And Aerosurf even better after that.

    Facts:

    1. one approved device

    2. one approved drug

    3. $40 million in cash

    4. no debts

    5. no preferred stocks

    6. no impending warrants (outside of the 5yr 5M at 2.80)

    8. exclusive rights

    9. excellent pipeline

    10. Newly partnered (Batelle for R&D)

    11. MAA approval soon

    12. New device new drug launch soon

    13. Mkt Cap 128 million ???

    At 3 times sales, this is already $400 million firm, and that is $10 PPS. DSCO === Hidden Gem.

  • Report this Comment On July 13, 2012, at 7:06 PM, gailceleste wrote:

    Nicole,

    I LOVED your cooking analogies. I am not 100% sure against market timing.

    All the stocks you mentioned look like good choices.

    Thanks.

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