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Dodge & Cox Stock Gets Going on Motorola Mobility Deal

Mairs & Power launches first new fund in 50 years, and more.

Morningstar Fund Analysts, 08/18/2011

Dodge & Cox Stock's DODGX comeback attempt got a boost this week from Google's GOOG agreement to buy Motorola Mobility MMI for $12.5 billion.

Dodge & Cox Stock has owned Motorola since 2003, several years prior to its 2011 split into Motorola Mobility and Motorola Solutions MSI. The fund's reasons for holding the stock are consistent with its long-term, contrarian style. The stock experienced a steep decline after 2006, but the management team stuck to the holding because it believed the value of the firm's intellectual capital and existing businesses, as well as its strong balance sheet, were ignored by the marketplace. Other top owners of the stock include T. Rowe Price Mid-Cap Growth RPMGX, Dodge & Cox Balanced DODBX, and T. Rowe Price Mid-Cap Value TRMCX.

Google's acquisition of Motorola Mobility verifies some of the management team's ideas. Google paid a 63% per-share premium compared with the stock's closing price on Aug. 12, suggesting that it also recognized the firm's value beyond what the share price reflected.

Dodge & Cox Stock held 5.4% of shares outstanding as of June 30 portfolio data, so, based on that figure, the sale would bring the fund around $635 million in cash once the acquisition is complete. The influx of cash would be only approximately 1.5% of the fund's nearly $42 billion asset base. Nonetheless, it should be welcome to the fund; the managers see attractive investing opportunities, but it has been in net outflows for the past few years. The acquisition should have no tax impact on shareholders because the fund still has tax-loss carryforwards from previous years to offset the capital gains.

The deal is a feather in the fund's cap after some up-and-down years that caused many shareholders who flocked to the fund earlier this decade to jump ship. The fund, a top performer from 2001 through 2005, hit a rough patch in the 2007 to 2009 bear market. Since the market's bottom in March 2009, however, it's gained 31% on an annualized basis through Aug. 16, 2011, compared with 27% for its category average.

While the planned acquisition of Motorola Mobility helps the fund, the managers don't purchase stocks purely on the hope that they'll be acquired. In fact, while the fund was a significant owner of Motorola Mobility's shares, it was not a particularly high-conviction name in the portfolio; the stock held less than 1 percentage point of the portfolio as of June 30, 2011. The fund's continued comeback will depend on the steady execution of its long-term, value-oriented strategy rather than sudden events like this acquisition. For example, the fund still owns similarly out-of-favor mobile-device maker Nokia NOK, which also gained this week.

Mairs & Power Launches First New Fund in 50 Years
Mairs & Power launched Mairs & Power Small Cap MSCFX, the firm's first new fund since 1961. The launch comes as asset growth within its existing fund lineup made it increasingly difficult to gain meaningful exposure to small-cap stocks.

Mairs & Power Growth MPGFX was started all the way back in 1958 as an all-cap fund, but the fund's assets had ample opportunity to grow to its current size of $2.2 billion, and the fund's small-cap exposure is now being eclipsed. For instance, the fund owned 16.6% in small-cap stocks in September 1990 compared with 9.5% in December 2010. With the launch of the small-cap fund, Mairs & Power Growth may end up de-emphasizing small caps in its strategy.

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