I often hear from frustrated investors lamenting the lack of diversity on the Australian sharemarket. But what really scares me is the amount of money that Australians have invested in our four largest, highly leveraged banks, and two highly cyclical resources giants, BHP Billiton and Rio Tinto.
Investors often have more than 50 per cent of their portfolio invested in this six-pack, despite being first in the firing line if Australia suffered a China-induced downturn, for example.
That's why I recommend keeping banks, including any debt securities issued by the banks, to no more than 10 per cent of your portfolio. Ditto for the iron ore titans.
Last week, I discussed how owning a share in two of the world's most valuable brands, Apple and McDonald's, could help protect the value of your portfolio under such a scenario. Let's take a look at two more potential opportunities (note that all values are in US dollars).
Oracle (NASDAQ: ORCL)
Oracle develops software and hardware for the world's largest corporations. Its products manage almost every aspect of a business - from finance and sales to customer and supply chain management.
On almost any measure, Oracle is a financial powerhouse.
It even holds 22 per cent of its current market value in cash, an important consideration given many US-based companies are waiting for tax concessions that would allow them to repatriate overseas cash to potentially increase dividends and share buybacks.
Oracle has a lock, too.
Once a company has spent millions installing one of its systems, the cost and complexity of replacing it with a competing system prevents many from doing so. That's why the company collects a high-margin annual management fee typically worth more than 20 per cent of the cost of the installed system.
Almost every customer pays it because to opt out and then return later is even more expensive. And besides, few companies want to risk losing sales due to a major system malfunction. Switching costs are extremely high and high-risk.
While the business model is easy to understand, the technology isn't. IT is an industry subject to constant change and Oracle sceptics consider cloud computing a threat.
Thus far, the company has successfully switched services to the cloud by hosting a client's computer system, for example. Despite the rapidity of industry change, this hasn't impacted Oracle's profitability but I suggest keeping your portfolio limit to 5 per cent.
JCPenney (NYSE: JCP)
Due to an unsustainable discounting and coupon-driven promotional strategy, US discount department store JCPenney reported falling sales for years.
US investor Bill Ackman - founder of hedge fund Pershing Square, which has amassed a 20 per cent stake in JCPenney - has embarked on a turnaround strategy that involved poaching Ron Johnson from Apple. Johnson is lauded for his long tenure at Target and, more recently, developing Apple's retail stores. He has also made a personal $50 million ''bet'' that he can turn JCPenney's fortunes around.
Real estate group Vornado Realty Trust (NYSE: VNO) has also taken a large position in the company, with its highly respected chief executive, Steven Roth, joining the board.
JCPenney owns 49 per cent of its floor space and pays on average just $4 per square foot for the remainder. Sales are about $130 psf, compared with more than $600 psf for JCPenney's store-within-a-store concept, Sephora. Johnson plans to propagate this model by introducing ''100 brand-focused shops within a shop'', which includes Nike and Levi's. By 2015, such brands should account for 75 per cent to 80 per cent of sales, up from 45 per cent currently.
Attracting a new audience is risky though. Amid much hype, Johnson lured his former Target colleague, Mike Francis, to head JCPenney's marketing, but he ''departed'' after just nine months when sales capitulated following a poor response to the new everyday low prices approach.
If sales can be increased to $177 psf by 2015 with $900 million of identified cost cuts, Pershing Square believes JCPenney can increase earnings per share to $6. That would almost put the stock on a price-to-earnings ratio of three. More optimistically, with sales of $200 psf, earnings per share could increase to $9.25, making the current price a steal.
JCPenney's retail properties help protect the downside. You can buy shares for much less than the average $26 that Ackman paid and I suggest a maximum portfolio limit of 5 per cent.
Nathan Bell is the research director at Intelligent Investor, intelligentinvestor.com.au. This article contains general investment advice only (under AFSL 282288).