Top 10 Buys and Sells by Our Ultimate Stock Pickers

By Greggory Warren, CFA | Senior Stock Analyst

The second quarter saw the return of increased volatility to the global equity markets, as concerns over the European credit crisis and its potential impact on the global economic recovery had investors moving away from riskier asset classes. It was against this backdrop that our Ultimate Stock-Pickers were reviewing their portfolios, making purchases or sales that would prepare them for the next stage of the market. Unlike the first quarter of the year, when our top managers were imbued with a sense of cautious optimism (and there was even a growing belief that improvements in corporate profits and balance sheets would hold up in the near term), the second quarter saw a more reserved attitude about the markets and the economy.

As we were sifting through the holdings, purchases, and sales of our Ultimate Stock-Pickers, we were intrigued by the dichotomy that continues to exist among our top managers. Many have been taking measured steps to invest in companies that have relatively stable revenue, sound balance sheets, and increasing cash balances that can be used for debt repayment, dividends, or share repurchases. Meanwhile, others continue to focus on more cyclically sensitive firms that may have room to run even after their spectacular rise during the market rally over the last year and a half. Even with the dip in the markets since the end of the first quarter, indices like the S&P 500 Index  are still up more than 50% since the markets bottomed in early March 2009. What the drop in the markets has done is create buying opportunities for our top managers.

Ultimate Stock-Pickers' Top Holdings

Data as of 09-02-10. Fund ownership data as of funds' most recent filings.

Even with the changes made to the Investment Manager Roster at the start of the year, there haven't been any significant changes in the top ten stock holdings of our Ultimate Stock-Pickers over the last year. Just two of the top ten highest conviction holdings of our 26 managers,  ExxonMobil  and  American Express , were not on the list at the end of the second quarter of 2009. While ExxonMobil was on the receiving end of significant purchase by insurer Alleghany Y during both the first and second quarters of 2010, both it and American Express moved up the ranks more by virtue of two names falling off--Burlington Northern and  Pfizer --than anything else. 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 this year. Meanwhile, Pfizer took a tumble down the list after  Fairholme dumped what had been a rather substantial holding in the health care firm.

Looking at the trading activity in these top ten holdings, our managers were net accumulators of Berkshire Hathaway's common stock, although at a much lower level than we've seen in past periods. The same could not be said for  Johnson & Johnson , which saw high conviction purchases from  Yacktman ,  Amana Trust Growth , and Berkshire during the period. There was also a meaningful sale by  Parnassus Equity Income , but it wasn't enough to disrupt the net buying activity by our top managers.  Coke  was also the recipient of several high conviction purchases during the period, with Alleghany, Yacktman, and  Aston/Montag & Caldwell Growth  all putting additional money to work in the name. This compares with rival  PepsiCo , which is thirteenth on our list of top holdings of our Ultimate Stock-Pickers, and saw just two meaningful purchases during the quarter, by Yacktman and the  Jensen  fund.

As we noted above, Alleghany continues to build a large position in ExxonMobil, adding another 2 million shares to its previous 4 million share stake. At the end of the second quarter, the energy giant was Alleghany's largest stock position, accounting for 40% of its equity portfolio. The insurer continues to fund its purchase of ExxonMobil with sales of other energy firms, like  Plains Exploration & Production ,  Apache , Global Industries ,  Devon Energy ,  Nustar Energy , and  Williams Companies . Almost presciently, Alleghany did not have stakes in either  BP  or  Transocean  prior to the Deepwater Horizon disaster that morphed into the Gulf oil spill earlier this year. The insurer's large stake in ExxonMobil is not without precedent, as Alleghany's holdings in Burlington Northern had made up as much as 40% of its stock portfolio just a few short years ago.

Our top managers were net acquirers of  Wells Fargo , with  Mutual Shares  being the largest purchaser of shares during the period. They were also big acquirers of  Microsoft , with  Oakmark Equity & Income  making a new money purchase in the name, and Alleghany, Yacktman, Jensen and Parnassus all making meaningful additions to existing stakes in the software giant. Of its new money purchase in Microsoft, managers Clyde McGregor and Edward Studzinski noted that the stock "finally reached a price that [Oakmark] found compelling." It wasn't the only name that caught the fund managers' eyes, though, as Oakmark also made meaningful new money purchases during the quarter in  Applied Materials ,  ITT Corporation , and  Sara Lee . The fund did get hit pretty hard, though, by losses on Transocean, which it had purchased in the first quarter of 2010 and was compelled to sell in response to the Gulf oil spill.

 Procter & Gamble  was the recipient of three meaningful additions, as Yacktman,  Amana Trust Income , and the Jensen fund all put more money to work in the name. Meaningful sales from both Parnassus and Berkshire, however, left our top managers as net sellers of Procter & Gamble during the period. Outright sales of  Wal-Mart  by both Oakmark and  Matrix Advisors Value  detracted from the aggregate holdings of that name as well, despite seeing meaningful additions by  FMI Large Cap ,  FPA Crescent , and Yacktman during the period. Oakmark noted that Wal-Mart was "eliminated (from the portfolio) due to a rethinking on [their] part about its management's positioning and strategy in the current environment." This ran a little contrary to FPA Crescent's thinking, as Steven Romick hinted in his quarterly letter that "blue chips" like Wal-Mart, Johnson & Johnson,  Aon  and  Anheuser-Busch Inbev  are all excellent examples of large multinational firms "with greater exposure to international markets that are growing faster than many more domestically oriented companies."

Winding down the list, American Express saw a few purchases during the period, but none of them were meaningful enough to be considered conviction purchases.  ConocoPhillips  saw more activity, but almost all of it was on the sales side. Berkshire continues to sell down its stake in the energy company, which Buffet has acknowledged was a major mistake, as the timing of the insurer's initial purchase was made when oil and gas prices were near their peak in 2008. Despite selling off close to 55 million shares over the last seven calendar quarters, Berkshire still held a 3% position in ConocoPhillips, worth around $1.4 billion at the end of June. Berkshire is also the largest holder of the energy company among the 11 Ultimate Stock-Pickers that hold stakes in the firm. This makes it likely that ConocoPhillips will fall off our list of top 10 holdings should the insurer continue to whittle down its holdings.

Ultimate Stock-Pickers' Top Purchases

Data as of 09-02-10. Fund ownership data as of funds' most recent filings.

With half of the list of top ten purchases by our managers already highlighted in the commentary we've made about their top ten holdings, we thought we'd focus on those names we haven't mentioned. Of these five firms,  American International Group  and  Goldman Sachs  really jump out, as they were high-conviction, new money purchases by Bruce Berkowitz's Fairholme fund. As you may recall from a previous article, Berkowitz has been making a big bet on financials, which now account for close to two thirds of Fairholme's stock portfolio. He was the sole purchaser of AIG, acquiring as much as one quarter of the property and casualty insurer's equity this year, and was the largest purchaser of Goldman Sachs, which was also a meaningful new money purchase for  Dodge & Cox Stock  and Mutual Shares during the most recent period. Fairholme also put new money to work in  MBIA  and  Morgan Stanley .

It's hard to argue with his performance, with the Fairholme fund up more than 6% year to date (compared to a 1% decline for the S&P 500). However, one has to wonder about the amount of risk Berkowitz seems to be taking on relative to the rest of the Ultimate Stock-Pickers. After all, while our top managers might be overweight financials, with their aggregate holdings in the sector accounting for 23% of total holdings, it is offset by large stakes in consumer goods (17%) and health care (13%). Berkowitz's second largest sector is business services, which accounts for 11% of total stock holdings. There may be some method to his madness, though, and Fairholme does tend to hold a fair amount of cash and fixed income to help offset some of the heavier bets made in the stock portfolio.

Of the other three names,  Pfizer  is of interest if only because Berkowitz dumped a large position in the pharmaceutical firm to make way for his headlong leap into financials. These actions did not deter three other top managers from buying Pfizer during the period, though, with Mutual Shares making a high-conviction, new money purchase, and Yacktman and FPA Crescent both making meaningful additions to existing stakes.  Occidental Petroleum  saw new money purchases from both FPA Crescent and Parnassus, and a meaningful addition from Alleghany and Aston/Montag & Caldwell. As for  MasterCard , it was a new money purchase for Parnassus, and a meaningful addition for  Oak Value , which believes "MasterCard enjoys a very strong competitive position within the highly concentrated and extremely profitable payment processing industry."

Ultimate Stock-Pickers' Top Sales

Data as of 09-02-10. Fund ownership data as of funds' most recent filings.

As for the sales, the list is a bit more reflective of what we would expect in more normal periods, unlike what we saw in the first quarter when major portfolio changes in Berkowitz's Fairholme fund had a big influence on the list. General Electric made the top ten sales by virtue of a major disposition by  Fairfax Financial (FRFHF), which completely eliminated a stake that has only been in its portfolio since the fourth quarter of 2008. Alleghany also sold off about one third of its stake in the conglomerate. In a less surprising move, BP  was dumped by three--Amana Trust Growth, Amana Trust Income, and FMI Large Cap--of the four managers that held it coming into the second quarter. Oddly enough, these outright sales were offset by a new money purchase at  Hartford Capital Appreciation (ITHAX), and a meaningful addition at Mutual Shares.

Hartford helped fund its purchase of BP with an outright sale of  Comcast , as well as  Newmont Mining (NEM) and twenty other positions in its stock portfolio. Both  Sound Shore (SSHFX) and  Tweedy Browne Value (TWEBX) joined Hartford in selling off meaningful portions of their stakes in Comcast. Looking at  Avon Products , there was one outright sale at  Columbia Dividend Income (LBSAX) and a meaningful reduction at Oakmark. And as we already noted, Plains Exploration & Production was dumped by Alleghany during the quarter to make room for the insurer's large position in ExxonMobil.

 Diageo , meanwhile, was sold at Dodge & Cox and  Markel (MKL), and was completely eliminated from the portfolio at Oak Value, which was concerned that the firm's "growth opportunities are likely to be somewhat muted for the next couple of years, and that the costs of (the company's strategic) realignment (would) weigh on the company's profitability." The fund's managers did note that Diageo remains an outstanding company, and a leader in its industry. They simply felt that, given the circumstances, the portfolio would be better served with the capital allocated to other opportunities.

As we already noted, both Oakmark and Matrix Advisors completely eliminated Wal-Mart from their fund portfolios which, along with sales by Aston/Montag & Caldwell and Sound Shore, reduced the stock's position somewhat in the top ten holdings.  UnitedHealth Group (UNH), meanwhile, was a major sale at Dodge & Cox, and an outright sale at Sound Shore, which was also a major seller of Newmont Mining. As for  Assurant (AIZ), it was an outright sale that helped fund new money purchases of Occidental Petroleum and  The Travelers Companies (TRV) at FPA Crescent.

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