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December/January Picks

Four offerings deemed to be right for right now.

Morningstar Analysts, 12/07/2010

Mutual Fund: PRIMECAP Odyssey Stock POSKX
This fund has great bloodlines. It is run by the same Primecap team that has generated outstanding long-term records at a number of funds it subadvises, including Vanguard Primecap VPMCX. The managers use a patient, contrarian-growth strategy and load up on firms whose long-term prospects are being overshadowed by near-term concerns. Right now, that's health-care stocks. The team has stashed more than one fourth of the funds' assets in the sector because it thinks the market is underestimating the potential for innovation at such top-10 holdings as biotech firm Amgen AMGN, medical device-maker Medtronic MDT, and pharmaceutical firms Eli Lilly LLY and Roche. Michael Breen

Exchange-Traded Fund: Vanguard S&P 500 ETF VOO
Vanguard has finally brought the granddaddy of index funds to the ETF structure with the launch of Vanguard S&P 500 ETF VOO. Vanguard has an incredible amount of experience running index funds with tax efficiency and at extremely low tracking errors. We think that this fund will be no different. As a new ETF, it is much smaller than its rivals, but it still trades competitively, because it benefits from being a separate share class of the Vanguard 500 mutual funds. What this means is that ETF shareholders benefit from economies of scale of the mutual fund, but it also means that the tax advantages of the ETF structure are shared with the mutual fund shareholders. Michael Rawson

Separate Account: Fiduciary Management of Milwaukee Large Cap Equity
This separate account proves the old saw that quality never goes out of style. Its portfolio is a who's who of dominant firms, capped by top holding Berkshire Hathaway BRK.A. Nearly all of its 30 holdings have earned an economic moat from Morningstar's equity analysts, and nearly half of them have wide moats--sustainable competitive advantages that give them an enduring edge over rivals. The portfolio's profitability measures are in line with the S&P 500's, but it has much lower debt levels. This quality bias means the separate account has lagged the market in its most-buoyant periods but has held up much better in rough patches. Expect more of the same. Michael BreenPAGEBREAK

Stock: Advanced Micro Devices AMD
Although Intel INTC has long dominated the microprocessor market, Advanced Micro Devices has periodically come up with innovative chip architectures that have turned the tables. The last time this occurred was in 2003-06, when AMD's Opteron processors took the processor performance lead from Intel. The result was impressive market share gains by AMD, particularly in the lucrative server microprocessor segment. Intel came back with a vengeance in 2006, when its Core 2 processors allowed the firm to win back the performance crown, and AMD has seen its competitive position spiral downward ever since. However, we think that AMD's fortunes could reverse. The firm plans to launch server chips code-named Interlagos and Valencia based on Bulldozer. We expect these new chips to provide a significant boost to AMD on the revenue and profitability fronts. We forecast that revenue will rise by 20% in 2010--AMD has been benefiting from strengthening demand for microprocessors. We anticipate growth of 10% in 2011, primarily driven by the success of Bulldozer. After an anticipated downturn in 2012, we think the firm will grow in the upper single digits to 10% range over the long term. David Krempa

Hindsight: October/November 2009
Our picks from the October/November 2009 issue have been solid rather than spectacular. The worst of the bunch has been Ken Heebner's CGM Focus CGMFX. It posted dismal results for much of the period before catching fire three months back. It has made up a ton of ground but still trails the S&P 500 since we suggested it.

Separate account Champlain Small Company has handily topped the overall market but lags its small-cap brethren the past year. That's fine. Manager Scott Brayman and his team are prudent, willing to give up gains in roiled markets in exchange for the piece of mind that comes from owning high-quality firms. Our ETF pick, iShares Dow Jones U.S. Medical Devices IHI, has matched the market's gain the past year and looks a touch overvalued to our ETF analysts. We're more sanguine about our stock pick, surgical tool maker Becton, Dickson & Co. BDX. It's posted a nice gain, but our analysts still think it's trading at a big discount to its fair value. Michael Breen

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