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Just before 2012 started, a group of family and friends asked me to give them advice on building out the ideal growth portfolio. I split my picks into three groups based on risk: core investments, tier one investments, and riskier tier two investments.
Below, I share with you how the hypothetical portfolio is doing, why it's doing so well -- though not nearly as well as just one month ago -- and I'll offer up my three best buys from the group right now.
Read all the way to the end, and I'll throw in access to a special free report about the social media play that isn't getting enough attention right now.
Jan. 1 Balance
March 3 Balance
|Apple (Nasdaq: AAPL )||7.5%||$75.25||$104.22||38.5%|
|Westport Innovations (Nasdaq: WPRT )||7.5%||$75.25||$52.75||(29.9%)|
|IPG Photonics (Nasdaq: IPGP )||7.5%||$75.25||$88.12||17.1%|
|Baidu (Nasdaq: BIDU )||5%||$50.00||$48.70||(2.6%)|
|MAKO Surgical (Nasdaq: MAKO )||5%||$50.00||$42.90||(14.2%)|
Source: Fool.com; includes reinvested dividends, as of market close, June 1, 2012.
When I sat down to write this article last month, my growth portfolio had returned an astounding 28% year to date. Those returns have gotten cut by more than half since then -- yet we are still beating the S&P 500 by 8.5 percentage points.
Several factors converged to beat down the portfolio in May. Most generally, there was a plethora of bad macroeconomic news that hit the presses -- from worries about European sovereign debt to slowed U.S. growth. When such news hits, growth companies in particular are hard hit, and the past month was no exception.
Take the case of Westport Innovations, a company that designs natural gas engines for trucks. In just the course of a week, Westport notched double-digit percentage gains -- and followed that up with equally bad losses. When the market is this unsure about a company, I take solace in the fact that, as a long-term investor, most of these gyrations will smooth themselves out over the decades.
By far my biggest loser in May, though, was MAKO Surgical. The company reported fewer procedures and RIO Surgical System sales than were expected, and the market roundly punished shareholders. Shares are down almost 50% since May 1.
Three best buys
Even though I believe the two aforementioned companies have bright futures, they didn't make the cut for my best buys for this month. The first company that did make the list is Apple. I like what famed investor David Einhorn recently pointed out: Apple is a severely misunderstood company -- its real strength is in software, not hardware. People like it when their electronics can communicate with each other -- as is possible with iOS.
"Once the user has a second device, [Apple] has captured the customer. At that point, a future competitor has to make a product that isn't just a little better, but a lot better to get people to switch," Einhorn stated.
Next on the list is Baidu -- otherwise known as the "Google of China." The company grew earnings by 76% and revenue by 75% last quarter. Despite this, Baidu trades at just 34 times earnings, and has a PEG ratio as low as Apple's -- at 0.59. Bears are right to be worried about slower growth in China, but they are missing the bigger point: Not even half of China's growing population have become regular Internet users yet. As more of China comes online, advertisers will pay Baidu top dollar for the company's advertising exposure.
Finally, we have IPG Photonics. I actually called the company out as a potential investment this month for my Roth IRA. IPG's lasers are on the cusp of overtaking conventional lasers in a number of different markets. The company offers a better, more reliable product for less than competitors charge.
Shares are down 28% over the past month, mostly on macroeconomic concerns. The company's lasers are primarily used for industrial welding, and a global economic slowdown would shrink demand. Despite these concerns, the company is a solid long-term buy in my book.
One of the most important traits of becoming a better growth investor is to know when to ignore the noise about the "next hot stock." No company has been getting more unwarranted attention right now than Facebook.
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