Skip to Content
Investing Specialists

Our Ultimate Stock-Pickers' Top 10 Buys and Sells

The market rally has made it much harder for our managers to put money to work.

By Greggory Warren, CFA | Senior Stock Analyst

The end of the fourth quarter of 2010 and start of this year's first quarter witnessed strong equity market performance, with the S&P 500 Index  up more than 15% over the last five months. It also marks the continuation of the rally that started in March 2009, which has led to a doubling of the index over the last two years. While the equity markets continue to respond to the economic recovery, which has moved forward in fits and starts, it was the change of control in Congress, as well as in many state capitals, that influenced the markets during the final quarter of 2010. Investors were encouraged by the thought of gridlock in the nation's capital, especially if it led to a reduction in the deficit (not to mention the national debt), and a more business friendly environment.

That said, last year's elections also spooked the municipal bond market, as many investors began to believe that state and local governments, which have had their tax revenues savaged over the last couple of years, would no longer be backstopped by the federal government. It also didn't help that several prominent politicians were calling for measures that would allow state and local governments to file for bankruptcy as a way of overcoming their budget woes. The nearly $20 billion in outflows seen at municipal bond funds during the fourth quarter of 2010 (and more than $30 billion since the start of October) was greater than the $14 billion that walked away from the segment during the final four months of 2008.

But this wasn't the only crack in fixed-income flows, as taxable bond funds saw more than $4 billion leave during December, which marks the first time since the financial crisis that money has left taxable bond funds. U.S. stock fund flows also ended the year in negative territory, with the more than $75 billion that moved away from these funds during 2010 going down as the second-worst period of outflows for U.S. stocks funds since Morningstar started keeping track more than ten years ago. All is not doom and gloom, though. We've seen positive inflows into U.S. stock funds through the first six weeks of 2011, with investor willingness to move up the risk ladder after pumping record amounts into fixed-income funds over the last two years, which is positive news for many of the top managers in our Investment Manager Roster.

It was against this backdrop that our Ultimate Stock-Pickers were reviewing their portfolios, and making purchases or sales that they felt would prepare them for the next move in the markets. Much as we saw in the third quarter, our top managers continue to have a reserved attitude about the markets and the economy. While there are glimmers of improvement out there, persistent weakness in the employment market will limit the strength of the recovery in the overall economy.

Ultimate Stock-Pickers' Top Holdings

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair Value# of Funds HoldingExxonMobil 3MediumWide85.530.947Coca-Cola 3LowWide63.921.0511Microsoft 4MediumWide26.580.8314Wells Fargo 4MediumNarrow32.260.8311Brkshr Hthwy 3MediumWide87.280.9711Johnson & Johnson 4LowWide61.440.8213Procter & Gamble 4LowWide63.050.8212ConocoPhillips 3MediumNarrow77.871.0710American Express 3HighWide43.570.8110Wal-Mart 4LowWide51.980.8713

Data as of 02-28-11. Fund ownership data as of funds' most recent filings.

Even with the changes made to the Investment Manager Roster at the start of last year, there haven't been any significant changes in the top ten stock holdings of our Ultimate Stock-Pickers over the last eight calendar quarters. Only two of the ten names listed above-- ExxonMobil  and  American Express --were not on the list at the end of the fourth quarter of 2008. ExxonMobil ran up the list rather quickly as the investment managers at  Alleghany  started throwing a lot of money at the name in the first quarter of last year. By the end of December 2010, ExxonMobil accounted for close to 40% of Alleghany's stock portfolio, with the insurer picking up another million shares of the energy giant during the fourth quarter of last year. Significant new money purchases by  Hartford Capital Appreciation  and  Yacktman  during the most recent period will likely keep ExxonMobil in the top spot for some time to come.

Unlike the energy giant, American Express moved up the list by virtue of two other top names--Burlington Northern Santa Fe and  Pfizer --falling off. As you may recall, all of the outstanding shares of Burlington Northern were acquired by Ultimate Stock-Picker  Berkshire Hathaway  /  during the first quarter of last year. That said, one could argue that this gap was taken up rather quickly by ExxonMobil, with Alleghany having had 46% of its stock portfolio tied up in the railroad at the end of the third quarter of 2010. So, in essence, American Express replaced Pfizer, which had been a rather substantial holding at Bruce Berkowitz's  Fairholme  fund before he dumped his stake in the health care firm.

While American Express did see some buying activity during the quarter, with  RS Capital Appreciation  making a meaningful addition to their stake in the credit card firm, the stock was completely eliminated from  Aston/Montag & Caldwell Growth , which also blew out its holdings in  Visa  in December of last year in response to the Federal Reserve's proposal to cap debit interchange rates. Even though this action will not affect American Express directly, fund manager Ronald Canakaris felt the proposal, in highlighting the higher cost of credit card interchange rates, could bring additional regulatory scrutiny down on the credit card industry.

One name that returned to the top ten list this quarter was  ConocoPhillips , which had fallen off last quarter after Berkshire and Alleghany had whittled away enough of their stakes to push the name out. It was replaced by another energy name,  Occidental Petroleum , which lost some steam this quarter after  Parnassus Equity Income  eliminated its stake, and Aston/Montag & Caldwell trimmed back its position, in the firm. Oddly enough, a meaningful addition by Alleghany to its stake in ConocoPhillips helped to push that firm back up into the top ten holdings during the most recent period. Looking at the trading activity among the other top ten holdings, our top managers were net buyers of  Coke , although there were no meaningful purchases in the beverage giant during the quarter. The same could not be said for  Microsoft , with nine of our top managers adding to their stakes, three of which were meaningful additions for  FPA Crescent ,  Jensen , and Alleghany.

 

As we noted recently,  Wells Fargo  was shaping up to be a top purchase for our managers but ended up falling just short of our top ten list. While much has been made of the 6 million shares Berkshire added to its stake in the retail bank during the quarter, it should be remembered that this represented just a 2% increase in the insurer's total stock holdings in Wells Fargo. Meanwhile, a new money purchase by Parnassus, and a meaningful addition by  Matrix Advisors Value  (which increased its stake in Wells Fargo by 52%), were enough to push it on the radar. As long as were on the subject of Berkshire, our top managers made no meaningful additions to or subtractions from the insurer during the most recent period, which seems about right given that the stock has been trading at less than a 10% discount to our analysts' fair value estimate for much of the last five months.

Moving on to  Johnson & Johnson , our managers were net sellers of the health care/consumer products firm, with the Jensen fund completely eliminating its stake in the name. Jensen used the proceeds from the sale of Johnson & Johnson to build a brand new stake in  Becton Dickinson . The fund also added to its holdings in  3M ,  Abbott Laboratories ,  Adobe Systems ,  Emerson Electric , Microsoft,  Omnicom ,  Paychex ,  PepsiCo , and  Procter & Gamble . Jensen was not alone in adding to its stake in P&G, with four more of our top managers-- Aston/Montag & Caldwell, Matrix Advisors, Parnassus, and Yacktman--adding to their holdings in the consumer goods giant during the most recent period.

Our top managers were net sellers of  Wal-Mart , though, with Aston/Montag & Caldwell completely eliminating its stake in the retail giant in January 2011. Fund manager Ronald Canakaris had significantly trimmed the fund's position following Wal-Mart's analyst day back in October, noting that while the company's focus on growth versus returns might prove to be an effective strategy longer term that it has limited visibility on strengthening earnings momentum in the near term.

Ultimate Stock-Pickers' Top Purchases

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair Value# of Funds HoldingExxonMobil 3MediumWide85.530.947CVS Caremark 3MediumNarrow33.060.945Procter & Gamble 4LowWide63.050.8212Microsoft 4MediumWide26.580.8314Cisco Systems 5MediumWide18.560.627Accenture 3MediumNarrow51.480.946Lockheed Martin 3MediumWide79.160.892PepsiCo 4LowWide63.420.879Kraft 3HighNarrow31.840.948Devon Energy 3HighNarrow91.441.047

Data as of 02-28-11. Fund ownership data as of funds' most recent filings.

With three names--ExxonMobil, Procter & Gamble, and Microsoft--on the list of top purchases by our managers already highlighted in the commentary we've made about their top holdings, we thought we'd focus on names we haven't fully expanded on. Of these seven firms,  Accenture ,  Kraft Foods , and  Devon Energy  really stand out, as each was the recipient of new money purchases during the most recent period. As you may recall, we believe managers tend to put money to work in new names only when they have a high degree of conviction behind the purchase. That's not to say, of course, that managers do not make high-conviction additions to their existing holdings, it's just that we believe it is far easier to put money to work in holdings they're already comfortable with than it is for them to make a bet on a brand new name.

Accenture was a significant new money purchase for both  Columbia Dividend Income  and Aston/Montag & Caldwell, something we had noted in a recent article. The following comments from the managers at Columbia Dividend Income echoed the thoughts Ronald Canakaris had about Aston/Montag & Caldwell's purchase of the global management consulting, technology services and outsourcing firm:

"We believe that Accenture should experience high, single-digit revenue growth in the coming year, as a result of its strong consulting and outsourcing bookings. The earnings growth should be higher than the revenue growth, as the company is disciplined in managing its expenses. The company also generates strong free cash flow from operations and should continue to do so with the support of the revenue and earnings growth."

Meanwhile, Kraft Foods is now held by eight of our top managers, with RS Capital Appreciation establishing a new stake in the company during the quarter, and Aston/Montag & Caldwell adding meaningfully to its position in the packaged foods firm. Of its purchase of Kraft, RS Capital Appreciation noted that their "attraction to the company [was] based on [their] opinion that it holds a collection of powerful brands that demonstrate above average growth potential around the globe and that�company management will execute on a plan to leverage those brands to drive increased value for shareholders." The fund managers also highlight the 2010 Cadbury acquisition as being a key strategic move for the firm, noting that they had held Cadbury (when managing Oak Value Fund) for the seven year period prior to the candy and gum manufacturer's acquisition by Kraft.

Looking at Devon Energy, the stock was picked up by three of our top managers during the quarter, with Alleghany making a meaningful new money purchase in the name. As for the other four names on the list,  CVS Caremark  was bought by three of our managers, with FPA Crescent making a meaningful addition to the name.  Cisco Systems , which was another name we recently highlighted in an article on high-conviction purchases, represented meaningful additions for Parnassus Equity Income, Yacktman, Matrix Advisors Value,  Oakmark Equity & Income , and RS Capital Appreciation. But not everyone was into buying Cisco during the period as Hartford Capital Appreciation completely eliminated its stake in the network equipment provider. And while Alleghany was making a meaningful addition to its stake in  Lockheed Martin , which had been a significant new money purchase for  Davis NY Venture  in its most recently reported period, both Jensen and Yacktman were increasing their stakes in PepsiCo.

Ultimate Stock-Pickers' Top Sales

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair Value# of Funds HoldingInt'l Coal Group 2Very HighNone9.871.791Occidental Petroleum 3HighNarrow101.971.116Merck 4MediumWide32.570.714Genzyme 3MediumWide75.450.973Humana U/RHighNone65.01NA1Kellogg 3MediumNarrow53.560.913Volkswagen VOW.DE4HighNone110 EUR0.69-Automatic Data Proc. 3MediumWide500.965Vulcan Materials 5MediumWide45.850.674W.W. Grainger 3LowNarrow133.210.971

Data as of 02-28-11. Fund ownership data as of funds' most recent filings.

Unlike the first few quarters of 2010, when major portfolio changes at individual managers--like Bruce Berkowitz's Fairholme fund in the first quarter and sales by  Fairfax Financial (FRFHF) during the third quarter--had a big impact on the list of top sales, the activity in the most recent period was a bit more spread out. That's not to say that portfolio changes at Fairholme and Fairfax did not have an impact, as Fairholme's elimination of  Humana  from its portfolio and Fairfax's sale of  International Coal Group  clearly demonstrate, it's just that their selling activity did not dominate the list.

As we've already seen, Occidental Petroleum was eliminated by Parnassus Equity Income, with Aston/Montag & Caldwell significantly trimming its position in the energy firm.  Merck , meanwhile, was completely blown out of Hartford Capital Appreciation and Aston/Montag & Caldwell during the most recent period. The managers at Aston/Montag & Caldwell had cited both Abbott Laboratories and Merck as being laggards during the latter half of 2010 as investors shunned pharmaceutical firms, trimming away periodically at Abbott and blowing Merck completely out of the portfolio in January of this year. Another health care name that saw some selling activity during the period was  Genzyme , albeit for much different reasons as the firm received a bid from  Sanofi-Aventis (SNY) during the third quarter of last year (that finally was agreed to in the middle of February of this year). In anticipation of this deal coming to fruition, both  Sound Shore (SSHFX) and Matrix Advisors started to unwind their positions, with Matrix Advisors completely eliminating Genzyme from its portfolio in January 2011.

Citing "lingering execution issues and weak overall category trends," Aston/Montag & Caldwell walked away from its stake in  Kellogg  after the cereal and snacks producer issued weaker-than-expected guidance with its third-quarter earnings release. While it's hard to tell why Hartford Capital Appreciation and  Mutual Shares (TESIX) soured on Volkswagen, we do believe the fact that both managers eliminated their stakes in the auto manufacturer is saying something. Hartford did, however, establish a new money stake in Fiat during the quarter, so maybe it is not completely giving up on the car manufacturers. Both funds also held Daimler at the end of 2010. The next two top sales-- Automatic Data Processing  and  Vulcan Materials --were both done by RS Capital Appreciation, with the managers noting that with ADP, which was completely blown out of the portfolio, they believed they had more attractive uses for the capital they had invested in the firm. In their view:

"[ADP]'s growth will continue to be challenged until the employment rate in this country meaningfully improves. Until then, the continued costs to invest in the necessary infrastructure will result in near flat earnings, especially in light of the very low returns achievable on invested funds for others because of the extremely low interest rate environment. Though the Fund's investment in ADP was profitable, our investment thesis required a more robust economic recovery in the US that produced higher employment than has been realized."

As for Vulcan, the managers at RS Capital Appreciation more than halved their stake in the firm, which according to our analysts continues to suffer from a disastrous downturn in the demand for crushed stone, sand, and gravel from the public infrastructure, housing, and commercial construction sectors. While not quite as dire of a situation,  W.W. Grainger , which has been impacted more by the economic downturn (given its lack of international exposure), met a similar fate at  FMI Large Cap (FMIHX), which completely eliminated its stake in the industrial firm. With Grainger's share price rallying some 40% from the start of the third quarter to the end of the year, though, we could hardly fault anyone for wanting to take some money off the table.

If you're interested in receiving e-mail alerts about upcoming articles from The Ultimate Stock-Pickers Team, please sign up here.

Disclosure: Greggory Warren owns shares in the following securities mentioned above: Becton Dickinson, Johnson & Johnson, Kraft Foods, and Procter & Gamble.

Sponsor Center