The Ultimate Value Investor's Portfolio

Like you, I'm a value investor. As such, not only do I spend my own time canvassing the investment landscape for attractively priced investments, but I also closely follow several other managers' positions and investment themes, hoping to gain new insight for my personal portfolio. And given that I only have one set of eyes with a finite amount of time available to devote to research, piggybacking on others' work and ideas can often lead to fruitful investments that may otherwise not be immediately apparent.

Thus, I regularly analyze the holdings of a group of investment funds that have had attractive long-term returns, apply a value-based approach to investment analysis, and have happened to appear on my radar screen. (Although  Berkshire Hathaway (BRK.B) and  Markel (MKL) aren't mutual funds, they buy equities for the investment portfolios of their insurance operations.) I think that investors who follow these managers will gain unique insights into the investment world, and potentially boost their own returns. Over time I might add or delete from this group as appropriate. (Note: Our trading policy prohibits us from trading stocks based on information gleaned from interviews.)

The funds are:  Ariel Appreciation (CAAPX),  Berkshire Hathaway (BRK.B),  Clipper (CFIMX),  Fairholme (FAIRX),  Harbor Large Cap Value (HAVLX),  Jensen (JENSX),  Longleaf Partners (LLPFX),  Legg Mason Opportunity Trust (LMOPX),  Legg Mason Value Trust (LMVTX),  Matrix Advisors Value (MAVFX),  Markel Gayner Asset Management (MKL),  Mairs & Power Growth (MPGFX),  Oakmark (OAKMX),  Oakmark Select (OAKLX),  Oak Value ,  Constellation Sands Cap Select Growth II (PTSGX),  Sequoia (SEQUX),  Tweedy, Browne American Value (TWEBX),  Weitz Hickory , Weitz Partners Opportunity (WPOPX),  Weitz Partners Value (WPVLX), and  Weitz Value (WVALX).

I've compiled a consolidated list of these funds' holdings and have assessed the relative attractiveness of each stock by detailing the number of funds holding a particular name. I then use the Morningstar Rating for stocks and the price/fair value (P/FV) ratio to determine if the stock is still at an attractive enough valuation to warrant a purchase, or at least further investigation. The managers of our watch list of funds might use similar metrics to determine when to buy, because I have often observed that as our price/fair value ratio decreases, more of these managers seem to either add to their positions or begin buying the stock.

For example, our price/fair value ratio for  Dell  fell to nearly 62% in June, and five more managers began buying the shares, with nine of them holding Dell as of June 30. Dell's price/fair value ratio is currently hovering around 55%, making it even more attractive. Another example is  Tyco , which had four more of the above funds purchasing its shares when the conglomerate cratered early this year. As of June 30, Tyco was the most common holding, with 12 out of 22 funds owning it.

In addition, since many value investors are also notorious for being early on a particular stock--meaning that they begin accumulating a position before it reaches its low point--astute investors can often buy a particular stock at a better price than some of these world-class investors. For example, in the recent Legg Mason Value Trust shareholder letter, star manager Bill Miller candidly indicated that he was too early in buying the stocks of the homebuilders, even though he continues to believe that these firms have a bright long-term future. At Morningstar, my colleague Arthur Oduma shares Miller's positive outlook on the homebuilding industry, and many of the homebuilding stocks still have 5-star Morningstar Ratings.

While Tyco, Dell, and some of the homebuilders are examples of stocks that still look attractively valued, it's also possible that some stocks held by these funds are fairly valued. For example,  Comcast (CMCSA) is one of the most widely held names by the above managers, but given its recent rally, my colleague Mike Hodel thinks the shares are appropriately valued. By comparing the holdings of these managers to Morningstar's research, potential investors are provided a more recent update on the attractiveness of a stock than by only scanning the delayed filings of these managers.

The Ultimate Value Investor's Portfolio
Given the overlap between our approach at Morningstar and the work being done by some of the best investment minds around, I thought investors could benefit by a model portfolio of the top 10 names recommended by Morningstar's analysts, and also owned by a number of these world class investors. I've selected the following 10 stocks based on the number of the above funds holding them, a 5-star Morningstar Rating for stocks, and the price/fair value estimates, using Morningstar's estimates of intrinsic value as of Sept. 7.

Without further ado, here is what I have termed The Ultimate Value Investor's Portfolio. While I cannot guarantee investment performance, I do think that investors who purchase these shares have the potential to earn attractive long-term returns.

The Ultimate Value Investor's Portfolio
Company	Morningstar    Rating*	# of Funds Owning**	Price/ Fair Value
Tyco		12	72.86%
Wal-Mart Stores (WMT)		10	79.10%
Dell		9	55.79%
Berkshire Hathaway (BRK.A) (BRK.B)		9	74.37%
Time Warner		7	84.00%
Expedia (EXPE)		6	55.70%
IAC/InterActive (IACI)		6	66.64%
Anheuser-Busch (BUD)		6	83.33%
Johnson & Johnson (JNJ)		6	84.11%
Sprint Nextel		5	59.18%
Pulte Homes (PHM)		5	69.19%
* Morningstar Ratings as of 09-07-06 ** Positions as of 06-30-06

I'll check back in with this list later this year, and give an update on the portfolio's performance. I'll also make any changes to the portfolio based on the above managers buying and selling, in addition to any Morningstar Rating changes for these stocks.