'Must-Have' Stocks

We try to own every one of them. Every single one. And if I had my druthers, I wouldn’t own any other stocks in the year 2000. Because these are the only ones worth owning right now in this extremely difficult, extremely narrow stock market. They are the only ones that are going higher consistently in good days and bad. I love every one of them, just as I loathe the rest of the stock universe.”[1]

– Jim Cramer, February 2000

Many times you will hear talking heads discussing the “must-have” stocks to own in your portfolio. They are usually the largest and fast-growing companies (Google, Facebook) or the providers of a hot product or service (Tesla, Cloudera). For instance, the Liberty Portfolio (”providing financial freedom for conservative investors”) has “3 Must-Own Stocks”[2] while Kiplinger has “10 Stocks Every Retiree Should Own”[3].

But I tend to look at the concept of “must-have” a little differently than most. I look for stocks in companies that have products or services deeply embedded in their customers’ strategy and operations. They play such a vital role that customers perceive their products or services as “must-have” in their business operations. This is a very different way of looking at must-haves.

In a time of expanding markets and a booming business cycle, it’s easy to forget that – as Lincoln said – these times shall also pass. During these inevitable down turns, shareholders find out – sometimes in the most spectacular ways – that their portfolio holding was a shiny toy for a customer but not all that important to their success. Think of it as a corporate pet rock. Management might ogle or fondle it, whisper their deepest secrets to it, but in the end it will have no impact on free cash flow

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