Our Ultimate Stock-Pickers' Top 10 Buys and Sells
We're seeing more new money purchases and outright sales from our top managers.
By Greggory Warren, CFA | Senior Stock Analyst
Despite all of the turmoil in the Middle East, and the spate of natural (and not-so-natural disasters) in the Asia-Pacific region, during the first quarter of 2011, the S&P 500 Index still rose 6%, and increased another 3% in April of this year. We also saw some of the strongest inflows into U.S. stock funds during the first quarter, with more than $25 billion flowing into these funds, which was the highest level of inflows into U.S. stock funds since the first quarter of 2006. International stock funds also saw a decent level of inflows during the period, with close to $15 billion flowing into them. The positive flow trends continued through April, with more than $2 billion flowing into U.S. stock funds, and close to $3 billion going towards international stock funds. 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 have seen over the last year, our top managers felt more comfortable putting money to work in names they already know during the most recent period as opposed to making a lot of new-money purchases. This was something we noted a few weeks ago when we did an early read on the buying activity of our Ultimate Stock-Pickers, observing that much of the buying activity in the first quarter was focused on additions to existing positions rather than purchases of new names. We continue to believe that the ongoing rally in the equity markets, as well as the uncertainty that prevails over the timing and strength of the economic recovery, have made it increasingly more difficult for our managers to move out of their comfort zones. That said, it was interesting to note (once all of the data was collected) that eight of the ten top purchases that were made by our Ultimate Stock-Pickers during the most recent period had one or more manager actually putting new money to work in the name.
More Changes in the Investment Manager Roster
Before going any further, we wanted to note the fact that we've made a few changes to the Investment Manager Roster since we last walked through the top holdings, purchases and sales of our Ultimate Stock-Pickers. Wanting to keep the list populated with what we feel are not only some of the best-performing managers in the industry but with funds that provide us with the timeliest information available, we expect to make changes whenever we feel they are warranted. That said, the two moves that we made this time around are based almost solely on the need to have more timely information, which, in our view, translates into more robust buy and sell ideas for investors. As such, we have removed Davis NY Venture (NYVTX) and Wintergreen (WGRNX) from the Investment Manager Roster, replacing them with Oakmark (OAKMX) and Oppenheimer Global (OPPAX), respectively. We have also been looking hard at the other names left on the list, even considering adding a few names to the roster that are focused more on mid-cap stocks--like Artisan Mid-Cap (ARTMX) and Meridian Growth (MERDX)--in order to try to tap into even more potential investment ideas.
While we are huge fans of Chris Davis and Ken Feinberg, who produce some of the most insightful commentary of the 22 fund managers on our Investment Manager Roster, we've struggled with the fact that the fiscal year-end at Davis NY Venture has always left us trailing the actions of these two managers. While the oldest data points on our current list of managers is from March 2011, with more than a handful of holdings updated through April of this year, the latest information we have from Davis NY Venture is from the end of January (with the company not slated to report its most recent quarterly holdings--from the end of April 2011--until the end of June). It also doesn't help that the fund has been in a bit of a slump, which made our move to Oakmark all that much easier. With legendary investor Bill Nygren at the helm, Oakmark has racked up a fairly impressive long-term track record. While the fund has traditionally been one of the purest value funds out there, Nygren has show a willingness to change his stripes when he finds growth stocks that meet his rather stringent investment criteria.
As for Wintergreen, while it pains us to remove a fund that was a runner up for Morningstar International Stock Manager of the Year last year, we continuously ran into problems getting timely data for the fund. David Winters tends to file his holdings as close to the 60 day SEC deadline as he can, which means that, more often than not, we are not capturing his holdings, purchases and sales in a timely enough manner to be useful for our reports. While it was difficult to find a fund that could match the rather impressive track record that Wintergreen has amassed over the last five and a half years, we felt that Oppenheimer Global would be a good fit. Rajeev Bhaman has been running the fund for close to seven years, and like his predecessor, Bill Wilby, employs a theme-based strategy that focuses on investing in companies that are most likely to benefit from mass affluence, new technologies, restructuring, and the aging of the population. Since Bhaman became co-manager of the fund in August 2004, Oppenheimer Global's 8% annualized return has edged out those reported by its typical peers by around 100 basis points.
Ultimate Stock-Pickers' Top HoldingsStar RatingFair Value UncertaintyMoat SizeCurrent Price ($)Price/Fair ValueMarket Cap ($bil)# of Funds HoldingExxonMobil (XOM)3MediumWide82.390.91407.98Coca-Cola (KO)3LowWide66.70.98152.29Wells Fargo (WFC)5MediumNarrow27.70.66147.312Microsoft (MSFT)4MediumWide24.670.77212.216Jhnsn & Jhnsn (JNJ)4LowWide65.510.8717912Berkshire (BRK.B)4MediumWide78.310.841848P&G (PG)4LowWide66.190.86184.211CncoPhillips (COP)3MediumNarrow72.340.99102.88Wal-Mart (WMT)3LowWide54.620.91190.914PepsiCo (PEP)3LowWide70.420.93111.310
Data as of 05-26-11. Fund ownership data as of funds' most recent filings.
Even with the changes made to the Investment Manager Roster, 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 (XOM) and PepsiCo (PEP)--were not on the list at the end of the first quarter of 2009. ExxonMobil ran up the list rather quickly as the investment managers at Alleghany (Y) started throwing a lot of money at the name in the first quarter of 2010 (having eliminated their rather large stake in Burlington Northern Santa Fe in the quarters leading up to the eventual purchase of that firm by Berkshire Hathaway (BRK.A) / (BRK.B) in February 2010). At the end of the first quarter of 2001, ExxonMobil accounted for 44% of Alleghany's total stock portfolio, with its next largest holding, ConocoPhillips (COP), accounting for just 9% of its equity holdings. While there was very little trading activity in ExxonMobil during the quarter, we're doubtful that it will be knocked from its top spot anytime soon.
Unlike the energy giant, PepsiCo has been a top holding for our managers for much of the last three years, but never quite had enough conviction behind it to get it onto the list of top ten holdings. While eight managers were buying the stock during the most recent period, it was meaningful additions by Yacktman (YACKX), Jensen (JENSX), and Amana Trust Growth (AMAGX), as well as a new money purchase by Oakmark Equity & Income (OAKBX), that really helped push PepsiCo up into the top ten. As we noted in a previous article, PepsiCo was bought with more conviction by our managers during the quarter than any other stock purchase. Of their new-money purchase of the stock, the managers at Oakmark Equity & Income had this to say about the firm:
"Pepsico is probably well-known to most shareholders, although the fact that the company is more of a food business (Frito-Lay) than a beverage business is often overlooked. Sluggish beverage growth in North America has helped to constrain the share price for the past year. Rising commodity prices have also reduced investor enthusiasm for the company. We believe that the share price more than discounts the headwinds facing Pepsico. We also like what we view as management's shareholder-friendly orientation."
Our analyst who covers the stock, Phil Gorham, recently noted that while PepsiCo it is not as undervalued as it at the beginning of the second quarter, it is an attractive core holding trading at a slightly discounted price. Much like the managers at Oakmark Equity & Income, he sees the market as being overly concerned with the floundering performance in the firm's beverage business, particularly in North America, and completely ignoring the fact that PepsiCo is essentially a snacks business. With two-thirds of the company's revenue coming from snacks, and almost all of PepsiCo's competitive advantages derived from its dominant position in chips, the firm's beverage operations are far less important than the market seems to be insinuating. That said, Phil believes that the biggest catalyst for the stock in the near term would be a recovery in the beverage business, which could help push the shares past his fair value estimate.
Looking at the trading activity among the other top ten holdings, our top managers were net sellers of Coca-Cola (KO), with Yacktman being the biggest seller of shares during the period. As you may recall, we recently noted that Yacktman had perceived greater value and held a much higher level of conviction in PepsiCo that in did in Coke at the end of the first quarter, with the former accounting for 12% of the fund's stock holdings (as well as being its second largest position), versus a 5% stake in Coke (which was its fifth largest holding). As for the two other consumer defensive names on the list-- Procter & Gamble (PG) and Wal-Mart (WMT)--there was some meaningful trading activity in both stocks. Given their belief that many consumer defensive names are extremely attractive right now, Yacktman led the charge on Procter & Gamble, with Jensen and Parnassus Equity Income (PRBLX) also making meaningful additions to their holdings in the consumer products giant. While several of our managers were adding to their stakes in Wal-Mart, it was an outright sale by Aston/Montag & Caldwell Growth (MCGIX) over concerns that the retail giant's "core customer remains challenged from a macroeconomic standpoint," as well as a meaningful reduction by Sound Shore (SSHFX), that really stood out.
Our top managers were also net sellers of Wells Fargo (WFC), Microsoft (MSFT), and Johnson & Johnson (JNJ) during the period. While we did see some buying in Wells Fargo, which our analyst Jaime Peters believes is currently trading at prices that imply it will never grow again, Hartford Capital Appreciation (ITHAX) made a meaningful reduction in its stake in the bank. Microsoft was also the recipient of several meaningful sales during the period, with Oakmark Equity & Income completely blowing out its stake in the software giant. Surprisingly enough, at the same time there were several managers adding to their stakes in Microsoft, with FMI Large Cap (FMIHX) and Dodge & Cox Stock (DODGX) both making new-money purchases in the name. The same could not be said for Johnson & Johnson, though, which was completely blown out at Jensen, and was a significant reduction for the managers at Fairfax FinancialFRFHF. Looking at Jensen in particular, the fund used the proceeds from its sale of Johnson & Johnson to build a brand new stake in Becton Dickinson (BDX), which was one of the top ten stocks purchased by our Ultimate Stock-Pickers during the period.
Ultimate Stock-Pickers' Top PurchasesStar RatingFair Value UncertaintyMoat SizeCurrent Price ($)Price/Fair Value# Funds HoldingCisco Systems (CSCO)5MediumWide16.250.5411PepsiCo (PEP)3LowWide70.420.9310JPMorgan Chase (JPM)4HighNarrow42.450.708Anheuser-Busch InBev (BUD)3HighWide58.310.945Intel (INTC)3MediumWide22.500.9810CME Group (CME)3HighWide284.110.863Potash Corp (POT)3HighWide55.181.102Metlife (MET)3Very HighNone43.460.915Bctn Dcknsn (BDX)4LowNarrow86.630.883Ecolab (ECL)3LowNarrow53.300.972
Data as of 05-26-11. Fund ownership data as of funds' most recent filings.
With two names--PepsiCo and Becton Dickinson--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 more fully on names we haven't discussed. Six of these eight firms-- Cisco Systems (CSCO), Anheuser-Busch InBev (BUD), Intel (INTC), CME Group (CME), Metlife (MET), and Ecolab (ECL)--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.
Much as they had been in the previous period our top managers were net accumulators of shares of Cisco during the first quarter, with three of the six managers buying the stock with conviction making new-money purchases. While market concerns over increased competition in the switches segment, slowing growth, and the potential for margin compression have put pressure on the stock, our analyst, Grady Burkett, remains bullish on Cisco. He believes that the business is still fundamentally attractive, and that the market is not appreciating Cisco's commitment to improving capital allocation and the company's management structure. The same could not be said for Anheuser-Busch InBev, which continues to trade around our fair value estimate. Despite being close to fairly valued, three of our top managers were making meaningful purchases of the stock during the quarter, with both RS Capital Appreciation (RCAPX) and Alleghany putting new money to work in the name. Of its purchase of Anheuser-Busch InBev, the managers at RS Capital Appreciation noted the following:
"AB InBev is the world's leading global brewer and controls more than 200 beer brands across a platform of operations in 23 countries. The company was created in 2008 with the acquisition of Anheuser-Busch by Belgium-based InBev. The legacy InBev operations include the majority ownership of AmBev, the largest brewer in South America. AB InBev also controls an effective 50 percent ownership stake in Modelo, the Mexico-based brewer of Corona. Our research efforts have focused on the global beverage alcohol industry for more than two decades with the Fund having held investments in the industry for more than a quarter of its history. After the highly publicized $53 billion acquisition of Anheuser-Busch, the InBev management team moved quickly to position the combined company for increasing growth and profitability as the global powerhouse in the industry. In our opinion, these initial efforts have been successful and have resulted in a growing business that demonstrates key competitive, structural, and economic advantages at a very attractive valuation."
Looking at Intel, our managers were net acquirers of the name, with Fairfax Financial, Parnassus Equity Income, and Yacktman all making new money purchases in the name. As for the rest of the names, which were held far less widely by our Ultimate Stock-Pickers, CME Group was a meaningful addition for Oakmark Equity Income and RS Capital Appreciation, and a significant new-money purchase for Columbia Dividend Income (LBSAX). The managers at RS Capital Appreciation were also aggressively buying shares of Ecolab, believing that the company is poised to start showing " significantly improved revenue growth and profitability" in Europe now that its multi-year restructuring and systems upgrade is complete. With Metlife, which was the last of our top purchases with new money buying activity, the managers at Sound Shore and Mutual Shares (TESIX) both committed new capital to the name, while Matrix Advisors Value (MAVFX) made a meaningful addition to an existing holding in the life insurer.
Ultimate Stock-Pickers' Top SalesStar RatingFair Value UncertaintyMoat SizeCurrent Price ($)Price/Fair Value# Funds HoldingMedtronic (MDT)4LowWide40.410.847Lockheed Martin (LMT)4MediumWide77.740.78-Avon (AVP)4MediumWide29.130.811Covidien (COV)4MediumNarrow54.630.827Microsoft (MSFT)4MediumWide24.670.7716American Exp (AXP)3HighWide50.680.948Motorola Slns (MSI)3LowNarrow46.881.073Tiffany (TIF)1MediumNarrow76.041.621Occidental Pet'l (OXY)3HighNarrow104.9915Baker Hughes (BHI)4MediumNone74.50.75 1
Data as of 05-26-11. Fund ownership data as of funds' most recent filings.
Unlike the first few quarters of last year, when major portfolio changes at individual managers--like Bruce Berkowitz's Fairholme (FAIRX) fund in the first quarter of 2010 and sales by Fairfax Financial 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. We also saw a lot more outright sales during the period, as we've already noted with Wal-Mart, Microsoft, and Johnson & Johnson. Much as the list of top ten purchases was inundated with new money buying activity, seven of the top ten stock sales during the most recent period-- Medtronic (MDT), Lockheed Martin (LMT), Avon Products (AVP), Covidien (COV), Microsoft, Tiffany (TIF), and Morgan Stanley (MS)--were heavily influenced by outright sales.
RS Capital Appreciation blew out both Avon Products and Tiffany during the period. While Avon's more recent results have disappointed the manager, it was concerns over the company's long-term competitive and structural advantages that led them to exit the stake. The same could not be said for Tiffany, which the managers expected to run into some near-term headwinds as a result of the Japanese earthquake and tsunami. Being one of the fund's best performers over the last couple of quarters, the managers decided to exit the stake as the risk/reward opportunity in the shares had become far less attractive. As for the two medical products firms on the list, Medtronic and Covidien, the funds that were selling--Parnassus Equity Income and Amana Trust Income (AMANX) the former and Matrix Advisors Value and Oakmark Equity & Income the latter--were primarily reducing their healthcare exposure and likely viewed these two names, which are both struggling in their own right, as ideal candidates for removal.
As for the rest of the sales, Lockheed Martin was completely blown out by both Oppenheimer Global and Alleghany, while Morgan Stanley received the axe from both Columbia Dividend Income and Sound Shore. While not quite as dramatic, American Express (AXP) was significantly reduced at RS Capital Appreciation, which probably did more selling this past quarter than in any period since the market rally started in March 2009. The same could be said for Alleghany as well, which along with Aston/Montag & Caldwell Growth made meaningful reductions in their stakes in Occidental Petroleum (OXY) during the quarter. And last but not least, we saw both Sound Shore and Mutual Shares completely eliminate their stakes in Baker Hughes (BHI) during the period.
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Disclosure: Greggory Warren own shares in the following securities mentioned above: Procter & Gamble, Johnson & Johnson, Becton Dickinson, and Avon Products.
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.