5 Stocks Top Managers Have Been Buying

Fantasy football enthusiasts won't make their last-minute roster moves before watching what the panelists on ESPN's Fantasy Football Now have to say. Countless homeowners have gotten useful tips about landscape lighting, eliminating drafts, and kitchen upgrades from Bob Villa and the subsequent hosts of This Old House. And who doesn't want to know what Martha Stewart recommends when it comes to throwing a memorable holiday party?

No, there's nothing wrong with a little free advice from experts--as long as you don't blindly follow the advice without doing your own due diligence.

With that in mind, we're taking a look at what the mangers at two of our favorite large-cap equity funds purchased last quarter. Of course, these stocks aren't automatic "buys" simply because these managers pulled the trigger. But given the track records of these investors, their stock picks may be worth looking into.

Skippers of the Gold-rated

DXC--which was created by the merger of Computer Sciences Corporation and

"We believe CEO Mike Lawrie is among the best turnaround managers at work today," they say in their latest commentary. "He has a history of taking leadership of underperforming IT companies, then removing costs, divesting assets and redirecting investments into high-return opportunities--a formula that has driven tremendous gains in shareholder value over time. We expect Lawrie will continue to execute on this proven blueprint as he integrates the HP acquisition and we believe that he is uniquely suited to uncover substantial hidden profits in this $19B business. DXC currently trades at just 10x 2019 consensus earnings, a significant discount to the S&P 500 multiple of 17x, despite DXC profits being forecasted to grow at a rate faster than the market for the foreseeable future."

Morningstar doesn't think DXC has yet carved out a moat, and assigns it a stable moat trend.

"Although DXC has the characteristics deserving of an economic moat, such as a large entrenched customer base and high switching costs, we lack the conviction to award a moat, given the inconsistency in CSC and HPE's ability to generate excess returns on invested capital," notes analyst Andrew Lange in his latest report. Lange acknowledges that turnaround efforts appear to be working--there's been improvement in operating margins, earnings, cash flow, and credit ratings at the individual firm level.

"We will continue to monitor the firm's competitive situation as it wields its newfound scale within the IT services sector and as it rotates to digital services workloads," he adds. "We will look to new and renewed contracts (particularly surrounding cloud infrastructure), large digital transformation deal wins, and strong book/bill ratios as signs of an improving economic moat."

Shares currently trade in 3-star range: DXC is fairly valued by Morningstar's metrics.

Last quarter, Nygren and Grant also scooped up shares of the largest discount brokerage firm in the United States, Charles Schwab. They explain:

"As the largest discount brokerage firm, the company is able to offer lower prices and invest more in superior customer service and technology than its peers. Schwab management calls this its 'no trade-offs' policy--i.e., investing to provide the best product at the lowest price, and these investments attract even more clients to Schwab’s platform. As a result, Schwab has been able to grow its client assets at a double-digit rate in recent years, and given that the company still has less than 15% market share, we believe such growth should continue for the foreseeable future. The company also meaningfully benefits from rising interest rates, as the higher rates allow Schwab to reinvest its bank deposits at higher yields. We believe the combination of client asset growth and rising interest rates should drive substantial asset growth at Schwab in the coming years, and on our estimates, the company is currently valued at a discount to the overall S&P 500 P/E multiple. We believe this represents a bargain price for a well above average business."

The stock is a bargain by our estimates, too: The wide-moat, stable moat trend company is trading in 4-star range, suggesting shares are undervalued.

"Given its massive scale and industry-leading cost efficiency, we believe the company can sustain severe competitive pressures, such as trading revenue dropping to $0, and still earn above its cost of capital," argues sector director Michael Wong in his latest report. Moreover, low costs and a large client give Schwab the flexibility to create new products that can ramp up quickly. For instance, while a relative latecomer to creating its own ETFs, Schwab is now among the 10 largest ETF providers, notes Wong.

The team at Gold-rated

"Alcoholic beverage manufacturer Constellation Brands, Inc. presents a unique opportunity to gain exposure to a very high-quality portfolio of irreplaceable brands such as Corona, Modelo, Pacifico, Ballast Point, Meiomi, Black Box, Casa Noble, and High West," they remark in their latest commentary.

Morningstar assigns Constellation Brands a narrow moat and stable moat trend.

"Constellation Brands has experienced substantial growth over the past decade, and we expect its portfolio of premium beer, wine, and spirits brands will allow for further top-line expansion (our outlook calls for nearly 7% compound sales growth over the next five years)," maintains analyst Sonia Vora. The firm owns six of the top-selling 15 imported beer brands and is one of the largest wine producers in the world. As a result, Constellation Brands has developed deeply entrenched relationships with distributors and retailers.

"We surmise these relationships will prove valuable as the firm expands its distribution and seeks shelf space for new fare," she concludes.

Shares of Constellation Brand are fairly valued today.

CVS was another pickup for Bath et al. last quarter.

"We initiated a position in pharmacy health care services provider CVS Health Corp., which was trading at a significant discount to our conservative estimates of intrinsic value following Amazon’s acquisition of PillPack," they report.

CVS is trading at a notable 24% discount to Morningstar's fair value estimate as of this writing. We assign the stock a narrow moat and positive moat trend ahead of its merger with Aetna.

"Considering the significant discount CVS' equity currently trades to our fair value estimate, we believe investors have an opportunity to acquire shares of a strong healthcare services firm at an advantageous price," emphasizes senior equity analyst Vishnu Lekraj in his latest report. In fact, Lekraj thinks that the combined entity "will be one of the most powerful players within the healthcare ecosystem."

The conglomerate's strong pharmacy benefits manager can negotiate top-tier drug pricing discounts with suppliers, allowing it to expand its client base and preserve its gross margins, notes Lekraj. And via Aetna, the behemoth will be able to sell insurance and manage members through every aspect of their treatment regimens.

Diamond Hill's final new purchase was NVR, the fourth-largest homebuilder in the U.S. by volume, concentrated in the Mid-Atlantic.

"While it operates in a cyclical and competitive industry, the combination of NVR's land-light strategy, leading local market share, efficient construction process, and excellent employee retention allows them to achieve high returns on capital over the long term while minimizing inventory risk," they say. "During good times, we believe NVR will be able to grow and benefit from housing tail winds. During bad times, management has proven to be excellent opportunistic capital allocators through repurchasing shares at attractive prices, entering new markets, and taking advantage of competitor distress."

Morningstar assigns NVR a no-moat rating and stable moat trend.

"NVR’s steadfast commitment to a capital-efficient homebuilding strategy has resulted in enviable profitability, cash flow conversion, and ROICs relative to those of its public peers," writes analyst Brian Bernard in his latest report. "We believe, however, that NVR's success has been the result of exemplary management rather than distinct competitive advantages over peers. Furthermore, the company operates in a very competitive industry, and actions taken by other homebuilders could have an impact on NVR's future performance. As such, we assign NVR a no-moat rating."

We expect NVR's home sales gross profit margin to stay range-bound around 19.3% over the next decade, he concludes. Shares of NVR are fairly valued today according to our metrics.