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Nine Buy Ideas from Our Best Performing Managers of 2009

Berkowitz's Fairholme Fund wasn't the only top performer on our list last year.

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By Greggory Warren, CFA | Senior Stock Analyst

With 2009 drifting away in the rearview mirror, we thought it would be interesting to take a deeper look at the holdings, purchases and sales of some of our best performing managers last year. In a period when just about everything in the stock market recovered strongly (especially off the lows set in early March of last year), it shouldn't have been too difficult for our top managers to generate positive returns. Beating the benchmark S&P 500 Index (SPX), though, which increased more than 26% (on a total return basis) during 2009, should have been a more difficult undertaking. Of the 22 fund managers we track, more than two-thirds of them--15 funds in total--beat the S&P 500 Index last year. Even better, most of them were not coming off a year of extremely terrible performance during 2008, although several of them did trail the benchmark by a fairly wide margin that year.

Winnowing the list down to a more manageable level, we decided to look at only those funds that had beaten the index by a sizable margin--in this case, 500 basis points--during 2009. This produced a list of eight managers that included Value, Growth and Blend funds. While  Fairholme (FAIRX) may have stolen the spotlight this week, with manager Bruce Berkowitz named as Morningstar's Domestic-Stock Manager of the Year, its impressive to see it was not the only fund producing strong performance during 2009. That said, Berkowitz had a stellar year last year, generating a 39% return after a less than 30% loss during 2008. Fairholme's approximately 9% annualized return over the last five years is much stronger than the gain reported for the S&P 500 Index. This was matched only by  Amana Trust Growth (AMAGX) and  Yacktman (YACKX), which reported gains of 32% and 59%, respectively, last year, along with annualized returns of 9% and 8%, respectively, over the last five years.

Total Return (%) Track Record for Best Performing Managers of 2009

 20092008200720062005Fairholme (FAIRX)39-29.712.416.713.7Amana Trust Growth (AMAGX)32.4-29.712.215.420.2Yacktman (YACKX)59.3-26.13.416-1.3Vanguard PRIMECAP (VPMCX)34.5-32.411.512.38.5Davis NY Venture A (NYVTX)32.1-40515.110.7Oak Value (OAKVX)33.4-33.74.914.2-1.4Matrix Advisors Value (MAVFX)37.5-40.21.516.30.9Wintergreen (WGRNX)32.8- 500 Total Return Index26.5-375.515.84.9

Total Return and Morningstar Rating data as of 12-31-10.

Interestingly enough, Berkowitz generated such strong performance while maintaining as much as one fifth of the fund's portfolio in cash throughout 2009 (which was also the case, ironically, with both Amana Trust Growth and Yacktman, where cash accounted for 17% and 14%, respectively, of fund holdings at the end of the most recent period). Berkowitz also ran a fairly concentrated portfolio last year, with two stocks-- Pfizer (PFE) and  Sears Holding (SHLD)--accounting for nearly a third of the fund's equity holding during 2009. Fairholme's top 10 holdings accounted for 80% of the equity component of the fund's portfolio at the end of the most recently reported quarter. Contrast this with Amana, where the top ten stock holdings at the end of 2009 accounted for less than one quarter of the fund's equity portfolio. Yacktman, while running a more concentrated portfolio, had only about two thirds of the fund's equity portfolio tied up in its top 10 stock holdings at the end of the most recently reported period.

Fairholme was also unique in that it did not have much invested in Technology and Media. These were two of the best performing sectors last year, and constituted more significant holdings at both Amana and Yacktman. Berkowitz made his biggest bet on Health Care, which accounted for more than one third of Fairholme's equity holdings--with Pfizer accounting for 20% of the fund's stock holdings. Surprisingly enough, though, it was health insurance and managed care providers  Humana (HUM),  WellPoint (WLP),  UnitedHealth (UNH), and, most significantly, WellCare Health Plans (WCG) that generated the bulk of the fund's outperformance in the Health Care sector, rather than Pfizer (which was up less than 10% during 2009). Berkowitz also doubled his stake in two Financial Services firms,  St. Joe Corporation  (JOE) and  AmeriCredit (ACF), which were up 19% and 149%, respectively, last year, and made some news last year by reestablishing positions in  Berkshire Hathaway (BRK.A)(BRK.B), a stock he had been a net seller of prior to the start of the bear market.

Contrast all of this with Yacktman, which significantly reduced its exposure to the Consumer Goods sector during the fourth quarter of 2008 and invested heavily in Media stocks, like  News Corporation (NWSA) and  Viacom (VIA.B), both of which were up more than 50% last year. The fund also benefited from strong performance from three of its other top 10 holdings:  Microsoft (MSFT) (up 60%), AmeriCredit (up 149%), and  Coca-Cola (KO) (up 30%). Yacktman also eliminated is stake in  Williams-Sonoma (WSM) during the third quarter of 2009, no doubt taking advantage of the more than tripling of the retailer's stock price from its lows during November of 2008.

While nowhere near as concentrated as Yacktman and Fairholme, Amana Trust Growth made a much larger commitment in the Hardware and Software sectors than either one of those funds. Amana Trust Growth's top 10 holdings at the end of 2009 included  Apple (AAPL) (up 147%),  Hewlett-Packard (HPQ) (up 43%), and  Google (GOOG) (up 102%). The fund had a sizable stake in technology-related (AMZN) as well, which was up more than 160% during 2009. We also find it remarkable that the annual performance of Amana Trust Growth has closely tracked that of the Fairholme fund in each of the last four years, given that Amana Trust Growth has been running a fairly diversified, more technology-heavy portfolio, in contrast with Fairholme's more concentrated, technology-averse fund.

Top 10 Holdings of Best Performing Managers of 2009

 Star RatingSize of MoatCurrent Price ($)Price/Fair ValueNumber of FundseBay (EBAY)3Wide23.230.976BrkshrHthwy (BRK.B)4Wide3,322.950.765Pfizer (PFE)4Wide18.530.715Microsoft (MSFT)3Wide30.450.955Cisco (CSCO)3Wide24.530.945Amrcn Exprss (AXP)3Wide41.980.784Coca-Cola (KO)3Wide56.191.024CncoPhllps (COP)3Narrow52.80.934P&G (PG)5Wide60.520.794Hewlett-Packard (HPQ)3Narrow52.20.954

Stock Price and Morningstar Rating data as of 01-07-10

When taken in aggregate, the top 10 holdings for our best performing managers of 2009 had a fair amount of overlap with the top 10 holdings of all of our Ultimate Stock-Pickers, with six stocks--Berkshire Hathaway, Pfizer, Microsoft, Coca-Cola,  ConocoPhillips (COP), and  Procter & Gamble (PG)--held in common. Given the dearth of investable ideas in the top 10 holdings of our eight best performing managers, we took a deeper look at the 100-plus securities held by these funds at the end of the most recent period, and came away with nine stocks that our analysts currently believe are trading at prices where investors should consider buying them. We've not only included these stocks in the table below but have collected commentary from our analysts reflecting their current thinking on these names.

Nine 5-Star Stocks Among Holdings of Best Performing Managers of 2009

 Star RatingSize of MoatCurrent Price ($)Price/Fair ValueMorningstar SectorApollo Group (APOL)5Wide63.940.6BusSvcsWstrn Union (WU)5Wide19.610.7BusSvcsP&G (PG)5Wide60.520.79Consumer GoodsGenzyme (GENZ)5Wide51.130.62HlthcareWellPoint (WLP)5Narrow63.660.67HlthcareUnitedHealth (UNH)5Narrow33.010.69HlthcareNovartis (NVS)5Wide51.910.71HlthcareMonsanto (MON)5Wide85.960.7IndstMatComcast (CMCSK)5Wide16.210.7Media

Stock Price and Morningstar Rating data as of 01-07-10

 Apollo Group (APOL)
With more than 450,000 students, Apollo is the largest for-profit university in the United States. Our analyst Todd Young feels that the firm's size and scale (which is the largest in the industry), its efficient operations, price-inelastic customers, and corporate- and government-aided student financing, provide Apollo with a wide economic moat. While near-term concerns over student default rates and revenue recognition practices have suppressed the stocks of for-profit education firms, Todd believes that strong demand for post-secondary education should continue to benefit companies like Apollo longer term.

 Western Union (WU)
Our analyst Brett Horn believes that Western Union is the clear leader in an industry where size confers significant advantages. With a network of over 375,000 agents worldwide, and a marked cost advantage over its rivals, he believes that Western Union is well-positioned to come out on the back end of the global economic downturn in a stronger operating position than its peers.

 Procter & Gamble (PG)
While Procter & Gamble's size confers tremendous benefits in terms of distribution, brand reach, and scale with suppliers, our analyst Lauren DeSanto believes that the household products giant was caught flat-footed in its response to the dramatic downturn in consumer spending. With a new CEO at the helm, however, and plans implemented to reinvigorate top-line and earnings growth, she remains confident that P&G will be able to reposition itself for the more challenging economy.

 Genzyme (GENZ)
Our analyst Karen Andersen believes Genzyme's in-house innovation and smart acquisitions have enhanced its ability to succeed globally. Despite the impact that ongoing supply constraints of two of its leading rare disease therapies have had on results over the past year, Karen feels the firm's manufacturing and strategy improvements should set the stage for a recovery in 2010.

 WellPoint (WLP)
As a leading health insurer, WellPoint's stock has been challenged by the uncertainty of health-care reform. Our analyst Matthew Coffina believes that WellPoint's economies of scale and broad, low-cost provider network provide it with distinct advantages. It is the largest managed care organization (by medical membership) in the United States and enjoys a particularly strong bargaining position when dealing with health-care providers.

 UnitedHealth Group (UNH)
The complete set of implications health-care reform holds for UnitedHealth are also difficult to anticipate, but Matthew thinks the company will continue to play an important role in financing health care services. He remains impressed with UnitedHealth's ability to leverage its 33 million medical members to negotiate large discounts with health care providers that want to be part of the company's network.

 Novartis (NVS)
In an industry plagued by stagnant growth, Novartis has emerged as a juggernaut in the pharmaceuticals industry with a uniquely diversified operating platform--which includes branded pharmaceuticals, generics, vaccines, diagnostics, and consumer products--and an industry-leading number of new potential blockbuster drugs. Our analyst Damien Conover expects the firm's recent move to acquire the remainder of  Alcon (ACL) it does not already own will only add to the mix, creating both revenue and cost synergies for Novartis longer term.

 Monsanto (MON)
Our basic materials analysts believe that Monsanto is a fierce competitor that continues to dominate a market that it essentially created more than a decade ago. While there have been some near-term headwinds--primarily from increased competition within its Roundup herbicide business--they feel that the firm's ongoing commitment to research and development and assertive capital allocation will allow it to continue to reward shareholders in the long run.

 Comcast Corporation (CMCSK)
Besides being the largest domestic cable provider, Comcast is also a significant provider of Internet and telephone services. Our analyst Michael Hodel believes Comcast's competitive advantages stem from the fact that no other company can match it ability to offer multiple services over one connection within the territories it serves. While he's not enthralled with the firm's move to acquire NBC Universal from  General Electric (GE), believing the combination of content creation and distribution will create little value for Comcast longer term, he feels the shares are relatively attractive at today's prices.

Disclosure: Greggory Warren own shares in the following securities mentioned above: Amana Trust Growth , Johnson & Johnson, and Procter & Gamble.

The Morningstar Ultimate Stock-Pickers Team does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.