This article is part of our Rising Star Portfolios series.
Well, we're up and running with the Messed-Up Expectations (MUE) Portfolio, my answer to the Fool's call to investing and (hopefully!) beating the market. As of last Friday, both of my picks were up: Transocean by 6.9% and Power-One by 1.9% -- even better, as of the 18th, the portfolio as a whole, including cash, was outpacing the market.
Right now, the amount of cash not invested yet is putting a pretty big drag on what I believe the portfolio is capable of doing, so I've been on the lookout for additional companies to invest in.
But where to look?
The first two companies I selected are from the energy sector of the market: oil and solar, respectively. While I think there are other intriguing possibilities there, I don't want to get too concentrated in one sector. If energy companies take a dive, I don't want to be too badly hurt.
One sector with a lot of companies to look at is technology. And one company in that sector that is pretty popular around Fool HQ is Apple
At Friday's close of roughly $307, it has 17.5% annual growth of free cash flow (FCF) priced in for the next five years, 8.7% for the five years after that, and 2.5% terminal growth (at a 15% discount rate). That 17.5% level is pretty steep, and while the market might be underestimating what it is capable of -- after all, it's done an average of 49% in annual FCF growth for the past five years -- I don't think it's underestimating it by an overly large amount.
Hopes -- high and otherwise
Further, the MUE Port isn't just about numbers. Investor psychology plays a big role, too. Right now, Apple is the market's darling, and that leads to high expectations. Similar darling accolades are often given to other tech companies, such as Juniper Networks
On the other hand, there's Microsoft
As for investor psychology, after rocketing upward from a split-adjusted $5 per share level to about $60 in the late 1990s, Microsoft's been trading for much of the past decade in the $20 to $30 range. That's given rise to a lot of investor apathy.
Yawn, so what?
But the company hasn't gone nowhere. It's increased FCF from $10.5 billion at the end of 2000 to $24 billion over the past four quarters. Meanwhile, its P/E ratio has compressed from the mid-60s in the first quarter of 2000 to less than 12 so far this quarter. This reminds me of what Coca-Cola
While history may not repeat, it does often rhyme as Mark Twain put it, and that would be good enough to make some money on the tech giant.
Coca-Cola and Microsoft are Motley Fool Inside Value selections. Apple is a Stock Advisor recommendation. Coca-Cola is an Income Investor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Coca-Cola, Microsoft, Power-One, and Transocean. 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.
Fool analyst Jim Mueller owns shares of Coke, Transocean, and Power-One, and is a beneficial owner of Microsoft. He works for the Stock Advisornewsletter service. The Motley Fool's disclosure policy has been living under a rock while the market has been going crazy these past two years, but we were able to coax it out over the weekend with some special tidbits (don't ask).