Here are the 10 stocks we consider our core holdings in the Club portfolio — and why

Published Thu, Nov 17 20222:01 PM ESTUpdated Thu, Nov 17 20224:51 PM EST

At the Investing Club, we generally try to keep our portfolio to around 30 stocks, give or take a few. Currently, we have 32. Anything much more than that becomes too unwieldy and prevents us from doing the daily homework that's needed to manage a successful portfolio. In light of Thursday's "Monthly Meeting," we wanted to identify what we consider our 10 core holdings of the 32. The core holdings are companies we like for the long term, due to their high-quality and best-of-breed characteristics. Here are some of the qualities we look for in a core holding. The company has to be the No. 1 or No. 2 operator in its industry. Great management teams with deep benches and strong track records of creating shareholder value. Significant cash flow generation and strong balance sheets. History of annual dividend increases and/or share repurchases that put money into shareholders' pockets in the form of cash or value appreciation. This list will, of course, evolve from time to time. We may consider a stock a core holding today but that could change three months from now. That's because our strategy is "buy and homework" not "buy and hold." The latter is an old-fashioned, less rigorous way to analyze stocks. With that said, let's get into our 10 core holdings, listed in alphabetic order, along with some of Jim Cramer's thoughts from Thursday's meeting. First up is the iPhone and consumer electronics maker Apple (AAPL). This has been an "own it, don't trade it" investment to us for years, and we see no reason for that to change. Apple's dominant hardware and growing services businesses provide a deep competitive moat and bundling opportunities. Its customer loyalty is unmatched, and it's hard to find a product with a customer satisfaction score of 98%, like what the iPhone has, according to the company. No wonder the company's installed base — the number of users who own an Apple product — grows every quarter. But it's not just the products that make Apple a great long-term investment. The company returns billions of dollars to shareholders every quarter through a dividend that has grown for 11 straight years, along with a share repurchase program that reduces the total amount of shares outstanding. Cramer's thoughts: "It's about customer satisfaction. It's about doing the right thing, and it's about having a worldwide [customer] base, which is just now moving into Indonesia and Brazil — so I think Apple's got multiple years ahead of it, even as these stupid analysts just constantly tell you this is the quarter they're going to miss," he said. Next is Costco (COST), the best-run retailer in the world. CEO Craig Jelinek and CFO Rich Galanti know how to operate a business and do right by customers and employees. To understand Costco's business model, it's important to know it's not a margin company, it's a volume company — and it turns a lot of inventory with few units. Costco is also a subscription business, and renewal rates are currently at historic highs because the value proposition at its warehouses is so good. It's the No. 1 place to buy groceries and goods regardless of the economic backdrop. On the horizon, we think it's likely that Costco will soon dip into its cash hoard and reward shareholders with a special dividend payment. It's a nice bonus on top of Costco's regularly scheduled quarterly dividend. Next year may also be the year when the company hikes its membership fee. Some of those pricing gains may get reinvested in the business to keep prices down, but a portion should also flow through directly to Costco's bottom line, improving earnings. Cramer's thoughts: "What the company is about is ... customer loyalty," he said. "That's the notion of Costco... it's about getting you in the store, and it's about the volume, and it's about being a lifetime member," he added. The big life sciences and health diagnostics technology leader Danaher (DHR) is a high-quality company run by an excellent management team, which is always looking for ways to create shareholder value. Case in point, a few months ago management announced plans to separate its environmental & applied solutions unit , which provides instruments and software to test water quality. This is a great asset, but it's a slower-growing part of the business with a smaller percentage of recurring sales at a lower margin. Getting rid of it could also bring in some cash, setting up management to make its next transformative deal. After this separation is complete late next year, the new Danaher will grow faster with very little cyclicality, and about 80% of revenues will be recurring, justifying a higher price-to-earnings multiple. Management sees its post-separation core business growing revenues at a high single-digit clip and earnings-per-share increasing in the double digits. Danaher is called an earnings compounder for a reason. Cramer's thoughts: "This is the opportunity to buy Danaher, and I think you should take advantage of it right now," he said. Alphabet (GOOGL) is another name we view as a core holding. Although the company's advertisement business turned out to be more cyclical than thought, Google is still the preferred destination for online ads, with offerings that include search, email, YouTube, maps, and Android OS. Once ad budgets start to expand again, Google's business will be on fire because it offers the highest return on investment for ad buyers. The company may be known for its search engine, but it has made strides to diversify its business and become much more than a pure ad play. Over the past few years, management has significantly stepped up its cloud computing efforts and those investments are paying off in a big way. Google's cloud business grew last quarter at a 38% clip, and represents about 10% of the company's total revenues. Now we want to be clear about something: Alphabet's expenses are too high right now , and the company must do more to better align its expense growth with revenue growth. We think they'll find religion, but until they do the stock could languish for a bit. Cramer's thoughts: "I think what you're going to see is a serious rationalization at Alphabet. I think they're going to come to a conclusion that they can't keep spending ... [on] products that don't make a lot of money," he said. "This company sells at 19 times earnings, so I'm willing to bet that 19 times earnings is too low for a company that has incredible discipline and really smart people," he added. Now for an industrial — Honeywell (HON). We've been backers of CEO Darius Adamczyk for years and it's hard not to like his style. Throughout the years, he has shed underperforming businesses in auto and residential construction and double downed on industrial software technologies. The current Honeywell has a lot going for it, with about 65% of sales focused on late-cycle end markets that can weather a softening economy. Aerospace is still in a post-Covid recovery mode with flight hours increasing and international travel picking up steam. Oil & gas is an industry that continues to see investment spending, given elevated prices and the imbalance of supply and demand. Honeywell's building technologies segment delivers consistent growth amid rising demand for so-called healthy buildings. With such a good book of business, it's no wonder Honeywell expects to deliver overall sales growth, margin expansion, adjusted earnings, and free cash flow growth in 2023, despite the volatile operating environment. Cramer's thoughts: "This is a company that [CEO Darius Adamczyk] has saved while we're waiting for aerospace. If we get aerospace to come back in 2023, like I think it will, I think there's a chance that this stock goes back to its old highs [near $234 per share], which is substantial," he said. Next is the healthcare company Johnson & Johnson (JNJ). We have often mentioned that J & J's pharmaceuticals business is growing faster than many of its peers and is on track to be a $60 billion business by 2025. And its medical technology business is about to accelerate after the completion of the $16.6 billion acquisition of heart pump maker Abiomed. But what makes J & J a special name is its plans to break up next year and separate its consumer products unit , which will be called Kenvue. We think this breakup makes strategic sense, as the two independent, market-leading companies will become more focused. Management will be able to move faster and more effectively allocate capital, while navigating different industry trends to meet the needs of customers and patients. Cramer's thoughts: "A $174 stock, best balance sheet in America, 2.5% yield...made an acquisition that is superior to anything I've seen and is ready to roll. I love it," he said. Another pharmaceutical core holding is Eli Lilly (LLY). Eli Lilly represents one of the best long-term growth stories in all of pharma thanks to the success of its current product lineup and recent launches, its minimal loss of exclusivity risk, a strong pipeline, and its ability to expand operating margins over time. About 70% of its revenues are made up of 10 products focusing on diabetes — its specialty — as well as oncology and immunology, among others. Collectively, these 10 drugs grew their sales by 18% year-over-year in the third quarter. Eli Lilly's best-selling drug right now is Trulicity, used for the treatment of Type-2 diabetes, but over the summer it launched its next-generation version, called Mounjaro, and its success so far has been unprecedented. While the Type-2 diabetes opportunity is exciting, what is most promising about Mounjaro is its ability to help adults combat obesity, which it could be approved to treat sometime next year. On the pipeline front, we remain encouraged with the work the company has done to combat Alzheimer's disease and believe its treatment Donanemab could be a potential winner in the space. Cramer's thoughts: Mounjaro "could be greatest selling [drug] of all time," he said. Shifting to finance, the next core holding is bank Morgan Stanley (MS). We have long been fans of CEO James Gorman's efforts to transform the firm into more than just a typical investing bank, which can be cyclical and has been a tougher business than it was a year ago. Morgan Stanley's acquisitions of online brokerage E-Trade and asset management firm Eaton Vance support our view that the company is branching out from its traditional roots, gathering assets to support a growing fee-based business. The bank is also one of the most dependable when it comes to returning cash to shareholders. The stock provides a stellar dividend yield of nearly 3.5%, and the bank has plenty of excess capital to repurchase stock quarter after quarter, while other banks have paused their buybacks. Cramer's thoughts: "The most important thing I would say about [CEO James] Gorman is he wants consistent revenues and consistent earnings and, therefore, he will have an ever-higher PE on ever-higher earnings. I like that very much. This is my favorite bank," he said. Pioneer Natural Resources (PXD) is an oil-and-gas producer with some of the finest assets in the Permian Basin, along with high-realized pricing, low-cash costs and the most attractive dividend yield in the S & P 500. Higher energy prices used to tempt oil producers to "drill, baby, drill," but this is a new era where producers like Pioneer are staying disciplined. Instead of spending more and flooding the market with new supply, companies like Pioneer are focused on maximizing cash flow generation and returning that cash to shareholders through dividends and buybacks. Pioneer prides itself on having a peer-leading cash return framework, explaining why its returning 108% of third-quarter free cash flow to shareholders . Cramer's thoughts: "I think that this stock could very easily go to $270, $280," he said. "PXD, one of my favorite names of all our core holdings." Last, but not leas, is the coffee retailer Starbucks (SBUX). This is a company that is still in the early stages of an incredible reinvention plan designed by founder Howard Schultz. These investments will unlock efficiencies in its U.S. stores by upgrading equipment and redesigning store formats to meet the evolving needs of its loyal customer base. Outside the U.S., Starbucks is aggressively expanding its footprint in China, targeting 9,000 stores in the country by its fiscal year 2025, up from about 6,000 today. That's a new store every nine hours over the next three years. The incoming CEO , Lax Narasimhan, was a solid hire, with nearly 30 years of experience leading and advising global consumer-facing brands, including a successful tenure as CEO of consumer goods group Reckitt Benckiser (RKT). Cramer's thoughts: "I have never, ever heard [Schultz] as fired up as he is," he said. "His China strategy, I think, is what you need." (Jim Cramer's Charitable Trust is long AAPL, COST, DHR, GOOGL, HON, JNJ, LLY, MS, PXD and SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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