What Has American Been Buying and Selling? -- Page 2

GE and the Banks
Purchases that mean more to American Funds were those it made in  General Electric (GE) and struggling banks such as  Wells Fargo (WFC),  Bank of America (BAC), and  J.P. Morgan Chase (JPM). The managers in CWI increased their GE stake by 18% to around 304 million shares, or roughly 3% of the firm. CWI purchased 46.5 million shares of GE in the fourth quarter of 2008, while CGRI added another 25.4 million shares, taking its position to 2.7% of the firm.

None of those calls have paid off so far. GE's shares have slumped a painful 50% for 2009 through early March, as fears subsist regarding its financial-services unit. GE is trading at a price/trailing earnings ratio of well below 10, though its assets/equity ratio is similar to that of many banks at about 8. It has cut its dividend substantially, and there is a meaningful chance that it will lose its coveted AAA credit rating. Still, Warren Buffett infused the firm with capital via preferred shares paying  Berkshire Hathaway (BRK.B) a 10% annual dividend, and GE retains attractive businesses in turbines, generators, and jet engines, among others.

CWI also increased positions in Wells Fargo, Bank of America, and J.P. Morgan Chase by 31 million, 29 million, and 19 million shares, respectively, while CRGI decreased its position in them by 19 million, 14 million, and 9 million shares, respectively. The overall result was a net gain for the American funds in these banks, whose stocks have dropped 70%, 80%, and 50%, respectively, in 2009 through early March.

Other Levered Plays
In lieu of adding to banks, CRGI added to media giant  Time Warner , telephone/cable firms  AT&T (T) and  Verizon (VZ), and railroad firm  CSX (CSX). Time Warner has come under increasing pressure from AT&T and Verizon, and it has struggled with the migration of advertising to the Internet. Still, it is a prodigious generator of cash, and its huge library of films arguably provides a measure of stability.

CRGI may have avoided highly levered banks, but it didn't shy away from highly levered casinos. Its managers added to positions in  Las Vegas Sands (LVS), of which it now owns 8%, and  MGM Mirage (MGM), of which it now owns 4%. CWI owns another 2% of MGM. Las Vegas Sands, in particular, has a shaky balance sheet, with $12.5 billion in total debt against $14.8 billion in assets. Moreover, it has struggled to make its interest payment on its debt with operating income for the past year.

Energy
Finally, CRGI was a somewhat significant seller of energy stocks for the quarter, while CWI didn't add much, making the result a net decrease in energy exposure. CRGI sold 8.6 million shares of  ConocoPhillips (COP), reducing its position by 18%. It still owns 2.4% of the firm. CRGI also reduced its position in  Chevron (CVX) by 16 million shares or 30%. It still owns 1.8% of the firm, while CWI owns nearly 3% of the firm.

If CWI didn't add significantly to the oil and gas "majors" ( ExxonMobil (XOM), ConocoPhillips, and Chevron), it did add to oil-services company  BJ Services , initiating its position in the quarter by purchasing 8% of the firm. CRGI kept its 2% ownership in BJ Services steady.

What Didn't Change
American has a contrarian streak and is perennially attracted to embattled stocks and industries. It also waits patiently--four years, on average--to sell stocks after they've had a chance to recover. Therefore, American left alone its positions in more than 200 stocks. Among the struggling stocks that it continued to hold were industrial conglomerate  Danaher (DHR), audio-equipment maker Harman International , and real estate holding firm  Brookfield Asset Management (BAM).

Conclusions
It's hard for any stock to make a big difference at the American Funds. That means that advances over the market will come incrementally, if they persist. A look at holdings across funds confirmed that American is typically attracted to what's down or out of favor, as its technology, GE, bank, casino, and Nordstrom purchases show. Granted, it's difficult to find stocks that haven't been smashed lately, but, true to its contrarian heritage, American appears attracted to more embattled firms and industries. Finally, as more than a hundred positions in both the CWI and CRGI portfolios went unchanged for the quarter, we continue to have confidence that American's long-term ethos remains intact. American likes bargains and will move when it thinks it has found some, but it also holds stocks as it waits patiently for them to surpass its fair value estimates. 

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A version of this article appeared on Morningstar.com on April 8, 2008.

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