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Investing Specialists

10 High-Conviction Buys from Our Ultimate Stock-Pickers

Recent buying activity offers insight into the thinking of our top managers.

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By Brett Horn | Associate Director of Equity Research

When we relaunched Ultimate Stock-Pickers, our aim was to come up with investment ideas that not only reflected the most recent activity of top investors we admire, but which we believed could be timely enough for investors to extract some value from them. By cross-checking the most current valuation work and opinions of Morningstar's cadre of stock analysts against the actions of some of the top equity managers in the industry, we hoped to uncover ideas that investors would find useful. With more than half of our Ultimate Stock-Pickers having already reported their fourth-quarter holdings, and most equity markets up more than 60% off their bear market lows--with the S&P 500 Index (SPX) posting double-digit returns in each of the last two years--we thought it would be interesting to see where our top managers have been putting money to work lately.

Looking at the purchases our Ultimate Stock-Pickers make in any given period, we tend to hone in on both high-conviction purchases, and new money buys. We believe that managers send signals about the level of conviction they have in a position by how much of their portfolio (on a percentage basis) they're willing to commit to a given name at any point in time. For example, we can generally assume that the managers at  FMI Large Cap (FMIHX), which had 5.5% of its stock portfolio invested in  3M Company (MMM) at the end of January 2011 compared to 2.8% in  Schlumberger (SLB), have a higher degree of conviction in 3M than they do in Schlumberger. That said, position size can sometimes be influenced by the amount of the portfolio a manager wants committed to a particular sector (especially when there are only a few truly investable ideas in the sector). It can also be influenced by large legacy positions that have become difficult to unwind, which seems to be the case with some of  Berkshire Hathaway's (BRK.A) (BRK.B) top holdings, like  Coca-Cola (KO) and  Wells Fargo (WFC), which made up 25.0% and 20.2%, respectively, of the insurer's total stock holdings at the end of the fourth quarter of last year.

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