The Morningstar Ultimate Stock-Picker's Portfolio
Our picks from the ideas of some of the best investment minds around.
Our picks from the ideas of some of the best investment minds around.
A few months ago, I analyzed a cross-section of the ideas from some of the best investment minds around and compared those ideas to Morningstar's research. I've renamed this model portfolio The Ultimate Stock-Picker's Portfolio, and I thought I'd check back in with it to see how I've done and give you a glimpse of where we're headed. To begin getting more frequent updates on this portfolio, be sure to sign up for my free e-mail alerts as well.
I regularly follow several well established investment managers, hoping to glean new insight for my portfolio by tracking both their holdings and investment themes. The problem with this approach historically has been assessing the real-time attractiveness of each name in these managers' respective portfolios, given that their filings are always somewhat delayed. However, by taking a cross-section of these portfolios with Morningstar's proprietary metrics and rating for stocks, I've been able to uncover current investment ideas that otherwise may have not been immediately apparent. (Note: Our trading policy prohibits us from trading stocks based on information gleaned from manager interviews.)
Since each investment manager must file a Form 13-F with the Securities and Exchange Commission every quarter disclosing their investment positions, I've compiled a consolidated list of their holdings and assessed the relative attractiveness of each stock by determining the number of funds that held a particular name. I also took a cursory look at the percentage of each manager's assets that have been committed to a particular stock as a measure of the conviction in a particular name. I then used the Morningstar Rating for stocks and proprietary price/fair value metrics to determine if the stock is still selling at an attractive enough valuation to warrant a purchase, or at least further investigation.
Portfolio and Performance
In the table below, I've listed my initial model portfolio, as well as the performance of this portfolio since its inception on Sept. 7, 2006. As of the end of February, I'm happy to report, this portfolio generated a pleasing 14.4% equal-weighted raw total return. What does this mean? In short, it means that with equal dollar amounts invested in each stock, the portfolio, in aggregate, generated overall growth (including dividends) of 14.4% from early September 2006 to the end of February 2007.
|The Morningstar Ultimate Stock-Picker's Portfolio|
|Company|| No. of |
| Beginning |
| Total Raw |
| Ending Star |
|Johnson & Johnson (JNJ)||6||84.11%||0.92%||5.00||82.80%|
|Pulte Homes (PHM)||5||69.19%||3.13%||5.00||79.89%|
|* Ratings and data as of 09-07-06 |
** Ratings and data as of 02-28-07
You may think part of this success is simply due to a rising market, which finished off 2006 in record fashion. Well, perhaps there were some tailwinds from this rising tide, but over the same period, the portfolio still outperformed the S&P 500's raw return by a full 5.68 percentage points. While it's still early--and the portfolio most likely won't have this type of outperformance over every period--I do think it indicates my methodology has merit.
The biggest contributors to this performance were InterActiveCorp (IACI), which climbed by more than 40%, Expedia (EXPE), which appreciated by 27%, and Time Warner , whose market value grew by 22% over our measurement period. The laggards in the portfolio were Johnson & Johnson (JNJ), Pulte Homes (PHM), and Dell , which returned only 0.92%, 5.15%, and 3.13%, respectively.
Potential Transactions and Manager List
Since eight of the stocks in the portfolio are still rated 5 stars as of the end of February, this means that Morningstar analysts presently believe each of these investments is still priced attractively enough to generate pleasing returns for owners over the long haul. As such, I plan to leave them in the portfolio. Two of the stocks, Tyco and Anheuser-Busch (BUD), are rated 4 stars, which means they are coming close to approximating fair value but still have a couple of legs left. Only one of the stocks, IAC, is rated 3 stars (fairly valued) and is a candidate for a potential sale.
To eventually replace IAC, I've created a watch list of 5-star stocks from the Sept. 30 holdings of the following investment managers.
|Investment Manager List|
|Ariel Appreciation Fund||CAAPX|
|Harbor Large Cap Value Fund||HAVLX|
|Longleaf Partners Fund||LLPFX|
|Legg Mason Value Trust||LMVTX|
|Markel Gayner Asset Management||MKL|
|Matrix Advisors Value Fund||MAVFX|
|Oak Value Fund||OAKVX|
|Third Avenue Value Fund||TAVFX|
|Tweedy, Browne Value||TWEBX|
|Weitz Value Fund||WVALX|
Since my original publication, I've updated the list of managers, which now amounts to 20 distinct funds, in order to create a greater breadth of potential investment opportunities. Please be assured, though, that each of these managers has an attractive long-term track record, as well as an approach to stock-picking somewhat similar to ours at Morningstar. In addition, even though Berkshire Hathaway (BRK.B), Markel (MKL), and Alleghany aren't mutual funds, they buy equities for the investment portfolios of their insurance operations.
The list below details the 12 stocks that are commonly held by the above investment managers as of Sept. 30, 2006, and that are also rated 5 stars by Morningstar analysts as of March 6. I've then ranked the stocks by the number of fund owners, the Morningstar price/fair value metric, and each stock's three-year annual expected return based on the discount rates and fair value estimates used by our analysts at Morningstar. I will also note that I am currently updating this watch list to include these managers' holdings from Dec. 31. To receive this updated watch list in the near future, and to be the first to see what the new addition to the portfolio will be, please sign up for my free e-mail alerts.
|Portfolio Watch List|
|Company|| No. of Fund |
| Star |
| Price/ |
|Cost of Equity**|| |
|American Express (AXP)||7||80.11%||10.00%||18.44%|
|Walt Disney (DIS)||5||85.95%||9.50%||15.17%|
|White Mountains (WTM)||4||71.10%||11.00%||24.37%|
|Bank of America (BAC)||4||76.16%||10.00%||20.45%|
|Yum Brands (YUM)||3||69.74%||9.50%||23.48%|
|United Tech (UTX)||3||82.27%||9.00%||16.33%|
|* Fund holdings data as of 09-30-06 |
** Morningstar data as of 03-06-07
Here are some Morningstar analyst takes on a few of the stocks on our list:
My colleague Jonathan Schrader wrote in a recent research report on Disney (DIS), "For years, we were unenthusiastic about Walt Disney, thanks to its poor corporate governance, poor profitability, and poor investment decisions (to name a few reasons). Our opinion, however, has changed significantly, largely thanks to the promotion of Bob Iger to chief executive officer in late 2005 (the board has also made major strides in improving corporate governance). Iger has brought a new openness and much-needed energy to Disney, while making a series of aggressive moves to bolster Disney's long-struggling animation studio and take advantage of the opportunities provided by new technologies."
My colleague John Owens recently commented on Yum Brands (YUM), "After reviewing Yum Brands' fourth-quarter results and taking a fresh look at our assumptions, we are increasing our fair value estimate. This reflects our increasing optimism that the company can generate double-digit earnings growth for at least the next decade on the back of its rapidly growing China business. Overall, we were pleased with the company's performance in the fourth quarter, as operating profit and earnings per share grew by 7% and 8%, respectively, with strong performances overseas more than making up for a difficult quarter in the U.S. market."
Morningstar analyst Debbie Wang said of Medtronic (MDT), "This wide-moat company's vision is to establish a significant presence in chronic diseases, in addition to its historical stronghold in heart disease. Investments in neurological, diabetes, and spinal products from the mid- to late 1990s have paid off in spades, offering new revenue streams and taking some pressure off heart products. Revenue from those three product areas inched up from 25% of total sales in fiscal 2000 to 35% in fiscal 2006. Compared with its peers, Medtronic relies less on any single type of product and is better able to weather glitches in the development or approval process for any particular new device."
Start Profiting Yourself
By signing up for my free e-mail alerts, you'll receive commentary on the stocks both in the portfolio and on the watch list, as well as any updates to our ratings and methodology. In addition, by becoming a Morningstar.com Premium Member, you'll have access to all of the proprietary metrics and analysis I use to make my selections. Perhaps most importantly, though, by signing on to this portfolio, you too will be able to start profiting from some of the ideas of the best investment minds around.
Justin Fuller has a position in the following securities mentioned above: AXP, DELL, MSFT, PHM, MDT, EBAY. Find out about Morningstar’s editorial policies.