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Investing Specialists

Three Picks From the Ultimate Stock Pickers' New Purchases

Combining our managers' recent activity with our ratings uncovers some ideas.

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By Brett Horn | Associate Director

We often like to take a look at what our Ultimate Stock-Pickers are buying for the first time within their portfolios, also known as new money purchases. Combing through the current holdings of our Ultimate Stock-Pickers gives only a limited indication of what stocks these managers believe are currently worth buying, as some of these holdings may have been bought a while back, when prices were at a different level. Looking at new money purchases give us some insight into what these stock pickers think are the most attractive buying opportunities right now. However, since these funds report their new positions with a lag, the prices they paid for these stocks could differ significantly from their prices today. Still, new money purchases are a better indication of potential opportunities than just looking a manager's overall holdings, in our opinion.

As we farmed through the list of the top 25 new money purchases for the most recent period, we paid particular attention to a few main factors. First, only two stocks were purchased by multiple fund managers. A new position purchased by multiple funds indicates that more than one manager views the particular stock as a great buying opportunity. The two stocks we found that met this criterion were  Bank of America (BAC), which was purchased by  Fairholme (FAIRX) and  Sound Shore (SSHFX), and  Teva Pharmaceutical (TEVA), which was purchased by  Markel Corporation (MKL) and  Oak Value (OAKVX).

Second, we looked at how many funds already owned the new money purchases. Out of the list of top 25 purchases, only four stocks were held by eight or more funds. Those stocks were Bank of America,  Comcast (CMCSK),  Berkshire Hathaway (BRK.B), and  Home Depot (HD). While not all eight funds purchased shares of the aforementioned stocks during the most recently reported period, knowing that a significant number of Ultimate Stock Pickers managers owned these stocks gives us some confidence that these companies are widely viewed as fundamentally attractive businesses.

Four- or Five-Star Rated New Money Purchases by our Ultimate Stock Pickers

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair ValueNo. of Funds HoldingApplied Mtrls (AMAT)5MediumWide12.300.564Apache Corp (APA)4HighNarrow87.880.674Bank of America (BAC)4HighNarrow15.110.608Brown & Brown (BRO)4MediumNarrow19.470.853Comcast (CMCSK)4MediumWide17.040.749eBay (EBAY)4MediumWide20.290.727Home Depot (HD)5MediumWide28.260.678Kellogg (K)4LowNarrow51.770.884Regions Financial (RF)4HighNarrow7.150.721Transocean (RIG)5HighNarrow51.830.455Sysco (SYY)4MediumWide29.620.856

Finally, we screened the new money purchases for stocks which are currently rated 4 or 5-stars by our Morningstar equity analysts. In our opinion, this gives the best indication as to which stocks still offer a substantial investment opportunity, since our ratings are current, and not reported with a lag. Three stocks from this list were rated as 5-stars:  Applied Materials (AMAT), which was purchased by Sound Shore, and  Transocean (RIG) and Home Depot, which were both purchased by Oakmark.

Below are our analysts' thoughts on these names:

 Applied Materials (AMAT)
Applied Materials is the behemoth of the semiconductor equipment industry, with unmatched scale and a broad product portfolio. The firm has steadily been establishing its solar equipment business in an effort to drive growth. While a cyclical downturn hampered Applied in 2009, the firm is now experiencing a rebound in business conditions.

 Transocean (RIG)
In our opinion, Transocean is the best-positioned driller to capitalize on numerous drilling technology breakthroughs, as well as higher oil and gas prices. These have led to strong secular trends supporting high levels of offshore exploration and development well into the next decade. Because Transocean owns the world's largest offshore drilling fleet, it will collect billions from customers eager to exploit large discoveries under the sea floor. Transocean's stock has been hammered due to its involvement in the Deepwater Horizon oil spill. Analyst Stephen Ellis doesn't dismiss the risk Transocean faces, but believe the risk/reward is tilted in favor of investors who are willing to stomach some uncertainty.

 Home Depot (HD)
Home Depot, the world's largest home-improvement retailer with more than $66 billion in revenue in 2009, spent the past three years battling economic headwinds and updating its distribution network. After a decade of aggressive expansion and store and concept growth, the company changed course; it sold its professional supply business in 2007 and closed its ancillary retail businesses in early 2009. Home Depot is now solely focused on its orange box stores and is engaged in a strategic overhaul of its supply chain. We believe the ongoing upgrades will strengthen the firm's competitive position, particularly as macro pressures abate in the coming years. The firm earns a wide economic moat rating because of its substantial economies of scale.

Disclosure: Brett Horn owns no shares in the securities mentioned above.

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.