Diversified Portfolio Pays off Long-Term

Thinking about the current state of the stock market, I can’t help but be optimistic for the rest of 2006. Corporations are running lean operations and both large and small companies alike are suitably profitable.

Inflation is a concern, but the Federal Reserve is dealing with it in a reasonable fashion. Job growth is solid and building and construction, particularly in the housing market, remains very strong. All in all, it’s hard not to be bullish going forward.

The broader market has already expressed its bullish view, with the main market averages doing very well since November of 2005. The current trend is positive and there is no reason for this to change over the very near term.

I think an aggressive equity portfolio should most definitely hold some alternative energy plays, some precious metal stocks, and several special situation opportunities. Special situation stocks are hard to define, but I categorize them as being attractive businesses that don’t necessarily fall into any traditional type of industry group.

Companies that I’ve mentioned before in this column that I consider special situations include PetMed Express, Focus Media, Color Kinetics, and Fuel-Tech, to name only a few.

Every equity portfolio, in my view, always needs to own a handful of these kinds of companies, which are so innovative that they actually redefine the business practices of the industries they were previously a part of. In a way, these kinds of companies innovate so much that they create a new industry category for themselves.

Attractive special situation stocks are more difficult to discover in the stock market, but rest assured, they are always out there. In my experience, they often don’t have much in the way of Wall Street or media exposure, as they are often smaller companies under the radar screen of the institutional marketplace.

Case in point: PetMed Express. The stock just hit a brand new high around $19 per share, having almost tripled in value in the last year. Only now, does a big investment firm like Oppenheimer initiate research coverage on the stock with a “buy” rating. Hello! You’re a little late to the party Mr. Big!

The broader stock market may be due for a bit of a rest over the next several months, but I feel good about 2006. Just remember that it does pay over the long haul to own a diversified portfolio with strong risk management. It also helps to own some great special situation opportunities as they arise.