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Top 10 Buys and Sells by the Ultimate Stock-Pickers

A group of top managers continue to keep looking for good investment opportunities, while taking full advantage of a rising (and potentially overvalued) market to book some gains.

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By Greggory Warren, CFA | Senior Stock Analyst

The rally in U.S. equity markets over the past five-plus years has not only led to a tripling of the value of the S&P 500 TR Index--from an intraday trading low of 673.88 on March 9, 2009, to an all-time trading high of 2,005.04 on Aug. 26, 2014--but has seen the market advance with relatively few corrections (of more than 5%), the last one taking place during the back half of 2012. While this has been good for investors overall, it has limited the options for our Ultimate Stock-Pickers, many of whom are now bereft of ideas in which to put new money to work.

As we noted in our last article, the buying and selling activity that we've seen from our top managers during the last four calendar quarters is the lowest that we've seen from them during the past five-and-a-half years. This trend toward fewer and fewer meaningful purchases started midway through 2013, with the buying activity of our top managers being much more notable for its breadth than for its level of conviction. With many of our Ultimate Stock-Pickers taking advantage of the run-up in the markets to trim or exit positions that have (in their minds) become fully valued, the first choice for some of our top managers has been to funnel the proceeds back into names that were already held in their portfolios (especially where there is a perceived relative discount to the market). For others, especially those not constrained by investment mandates requiring them to be fully invested at all times, it has meant building up cash balances to the point where they are more than double the average cash balance currently held by U.S. stock funds.

Even though the market as a whole looks modestly overvalued, with Morningstar's stock coverage universe trading at 1.03 times our analysts' estimates of fair value at the end of August, a case can still be made for stock market gains from this point forward.

Source: Morningstar Analysts

Looking back over the past decade, we've seen our universe of covered stocks continue to increase in two separate calendar years after the S&P 500 rose more than 25% during the preceding year (much as it did last year). During 2010, the market increased another 15% after gaining more than 26% during 2009, with Morningstar's stock coverage universe peaking at about 1.10 times our analyst's fair value estimates during the year. It could be argued that the 2010 gain was nothing more than the S&P 500 continuing its climb out of the depths of the 2008-09 bear market. However, we saw the same thing happen during 2004. Coming off of a nearly 29% gain in 2003, the market increased close to 11% that year, with Morningstar's stock coverage universe approaching 1.15 times our fair value estimates near the end of 2004. Based on these two examples, we have believed for much of 2014 that a 7%-12% gain in the value of the S&P 500 this year was within the realm of possibilities. With the market up about 10% at the end of August, we're already in the upper half of that targeted range. Our universe of covered stocks continues to imply that we're only modestly overvalued, so the possibility remains that the markets could move higher from here if we assume a peak of 1.10-1.15 times our analysts' fair value estimates.

As we noted last time, our Ultimate Stock-Pickers continue to be conflicted about what comes next for the markets, with fewer and fewer managers showing signs of bullishness. One of the best recent comments about the market environment came from  Tweedy, Browne Value (TWEBX), one of our top managers:

Whether or not we have reached bubble territory is subject to debate, but investors should be cognizant that, if risk is indeed largely predicated on the price one pays for a security, it is no time for complacency. As you well know, we are not about to make forecasts because in our mind, we are not sure from an investment standpoint that they are much better than random guesses. We think of ourselves as being in the business of chasing value, not performance, and we do know that we have to pay, on average, a whole lot more for a dollar of value today. Our experience has taught us that if we keep looking, and exercise some patience, opportunities will turn up.

That said, we still saw a fair number of high-conviction purchases during the most recent period, most of which were centered on companies with economic moats, as many of our managers continue to seek out higher-quality businesses trading at relative discounts (to their fair value estimates) in a market that (in many of their minds) has become fully valued. While the sheer number of purchases has dwindled as the market has moved higher, we are still seeing some overlapping trades among our top managers.

As in past periods, the aggregate holdings of our Ultimate Stock-Pickers in Utilities, Energy, Communication Services, and Real Estate remain underweight relative to the weightings of these sectors in the S&P 500 TR Index, with our top managers continuing to hold overweight positions in the Financial Services, Consumer Defensive, Basic Materials, and Health Care sectors (positions in Technology, Industrials, and Consumer Cyclical stocks remain within 50 basis points of the index). That said, we should note that Financial Services stocks--like wide-moat rated Visa and narrow-moat rated  Citigroup (C) and  Bank of America (BAC)--garnered the most buying interest from our top managers during the period. Both  Visa (V) and Citigroup showed up on our list of top 10 high-conviction purchases in our last article, when we noted that several managers had made meaningful additions to their holdings. And like Visa and Citigroup, Bank of America had garnered enough attention by the time that we had the final tally to make the list of top 10 stock purchases, with all three names seeing buying activity from five or more of our Ultimate Stock-Pickers. We also note that five of the top 10 purchases during the most recent period involved new money being put to work by at least one of our Ultimate Stock-Pickers, while nine of the top 10 stock sales saw one or more manager completely eliminating the name from their portfolios.

Ultimate Stock-Pickers' Top 10 Stock Holdings (by Investment Conviction)

Company Name Star Rating Fair Value Uncertainty Moat Rating Current Price (USD) Price/ Fair Value Market Cap (USD mil) # of Funds Holding Microsoft MSFT 3 Medium Wide 45.43 0.99 378,924 16 Wells Fargo WFC 3 Medium Narrow 51.44 1.03 270,109 15 Google GOOGL 3 High Wide 582.36 1.07 395,288 15 AIG AIG 3 High None 56.06 0.93 80,465 7 PepsiCo PEP 3 Low Wide 92.49 1.04 139,227 11 P&G PG 4 Low Wide 83.11 0.93 225,250 11 BerkHath BRK.B 3 Medium Wide 137.15 0.91 322,853 8 Oracle ORCL 3 Medium Wide 41.53 1.01 186,177 10 J&J JNJ 3 Low Wide 103.73 1.05 294,765 12 Apple AAPL 2 High Narrow 102.5 1.18 615,257 9

Data as of 08/29/14. Fund ownership data as of funds' most recent filings.

The overall buying and selling activity of our top managers during the most recent period also slightly affected the top 10 holdings of our Ultimate Stock-Pickers, with  Apple (AAPL) replacing  Wal-Mart Stores (WMT), which was sold outright by two of our top managers during the quarter. This is a bit of a rarity for a list that has seen relatively few meaningful changes since we relaunched the concept five and a half years ago. Two of the biggest changes that we have seen have involved wide-moat rated  Microsoft (MSFT) and  Google (GOOGL), which have become two of the most widely held stocks of our top managers, with 15 or more of our 26 Ultimate Stock-Pickers holding stakes in the names at the end of the most recent period. While a fair amount of this ownership comes from the growth-oriented managers on our Investment Manager Roster, we've seen more than a handful of our large-cap blend and value managers stepping up and investing in the two technology names. Although Microsoft is not necessarily new to the list, being held by 13 of our 26 Ultimate Stock-Pickers at the end of the fourth quarter of 2008, Google didn't really hit the radar until the latter half of 2011 and didn't make the list of top 10 holdings until the first quarter of 2012. It has also been interesting to see names like   American International Group (AIG) and Apple work their way up the list over time. AIG, in particular, had been a pariah for many fund managers until Bruce Berkowitz from  Fairholme (FAIRX) started buying up the stock in the first half of 2010, with several of our other top managers following his lead in picking up shares of the firm until it hit our list of top 10 conviction holdings during the third quarter of 2012. Apple, meanwhile, has been hovering around the list of top holdings since some of our Ultimate Stock-Pickers started buying up shares during the first half of 2013, with purchases and market gains the last couple of quarters finally putting it over the top. 

Ultimate Stock-Pickers' Top 10 Stock Purchases (by Investment Conviction)

Company Name Star Rating Fair Value Uncertainty Moat Rating Current Price (USD) Price/ Fair Value Market Cap (USD mil) # of Funds Buying Visa V 3 Medium Wide 212.52 0.95 131,146 6 Citigroup C 3 High Narrow 51.65 1.08 157,383 5 AMZN 4 High Wide 339.04 0.85 156,197 2 Progressive PGR 3 Medium Narrow 25.02 1.04 14,864 3 ThermoFisher TMO 2 Medium Narrow 120.21 1.12 48,062 3 Chubb CB 3 Medium Narrow 91.95 0.96 22,227 3 PepsiCo PEP 3 Low Wide 92.49 1.04 139,227 4 Noble NBL 3 Medium Narrow 72.14 0.96 26,544 2 BankAmer BAC 3 High Narrow 16.09 1.01 170,046 5 Monsanto MON 4 Medium Wide 115.65 0.89 60,612 3

Data as of 08/29/14. Fund ownership data as of funds' most recent filings.

As we've already noted, Financial Services stocks garnered the most buying interest from our top managers during the second quarter (and early part of the third quarter) of 2014. While  Oakmark (OAKMX), was involved in three of the high-conviction purchases--Visa, CitiGroup, and Bank of America--there was little in the fund's quarterly commentary about these additions. During the period, managers Bill Nygren and Kevin Grant focused more on their new money purchases--wide-moat rated (AMZN), wide-moat  Monsanto (MON) and News Corp (NWSA)--and their total eliminations--wide-moat rated  3M (MMM) and  ExxonMobil (XOM), narrow-moat rated  Cummins (CMI) and  Directv (DTV), and Forest Labs, which was acquired by narrow-moat rated  Actavis (ACT). That said, in his second-quarter commentary to investors Nygren did touch on the view that he and his colleagues at Oakmark have come to on Financial Services stocks, noting the following:

[M]any of the stocks that now have low P/Es on expected earnings are financials, and after their role in the crisis, many investors, including many value investors, have completely sworn off owning them. The argument usually goes something like this: “I lost a lot of money on my financial stocks during the crisis. The reason I lost money is that financial stocks have become very complicated and as a result are too difficult to value. To avoid future losses I will avoid investing in this industry.”

We also lost money in financial stocks during the crisis, but have come to a very different conclusion as to why. Financial companies had too much leverage, they let their underwriting standards decline, and most importantly, the real estate market crashed. Banks, as an example, collect deposits and lend them out, largely against real estate. If you had asked any investor in 2007 how their bank stocks would fare if real estate prices fell by 30%, I doubt that even one of them would have said, "I think they’d be fine." Our big mistake was that we didn't see the real estate crash coming. Today, financials are less levered, they have tighter underwriting standards, and most importantly, they do not seem likely to face another crash in real estate prices.

One of my co-managers for Oakmark Select, Tony Coniaris, posted an excellent piece on our website outlining our rationale for being so positive on financials. Today, the sector most of the Oakmark Funds are invested the heaviest in is financials, and I think we are in good company. As of year-end, Warren Buffett’s Berkshire Hathaway had invested over 40% of its public stock portfolio in financials, and, if you include its Bank of America warrants, that percentage increases to the mid-40s.

Adding to those comments, we would note that more than 19% of the aggregate holdings of our Ultimate Stock-Pickers at the end of the most recent period were invested in Financial Services stocks, which was about 425 basis points higher than the S&P 500 TR Index's commitment to the sector at the end of the June quarter--making it the most overweight sector bet for our top managers. Oakmark was joined by  Morgan Stanley Institutional Growth (MSEGX) in its purchase of Visa, with the growth manager also adding to its stake in narrow-moat  Progressive (PGR), which as we noted in our last article was a new-money purchase for  FMI Large Cap (FMIHX) during the most recent period. We also saw meaningful additions by  FPA Crescent (FPACX) and  Sound Shore (SSHFX) in Citigroup during the quarter, while the primary driver of the high-conviction purchase of narrow-moat  Chubb (CB) was Weston Hicks and his group at  Alleghany (Y).

 The other five high-conviction purchases during the period--wide-moat rated,  PepsiCo (PEP), and Monsanto, and narrow-moat  Thermo Fisher Scientific (TMO) and  Noble Energy (NBL)--were from a handful of different sectors. stood out for its valuation relative to the rest of the names, trading at a price to fair value estimate ratio of 0.85 times. As we noted in our last article, the stock was not only bought with conviction by Oakmark and Morgan Stanley Institutional Growth, but was a new-money purchase for the former fund, with manager Bill Nygren saying the following about his purchase of the technology stock:

That brings me to our newest position, which will no doubt make some question our credentials as value investors: Amazon. Consensus forward earnings for Amazon are a little over a dollar. At the median forward P/E multiple, Amazon would be priced in the low $20s. So, even though the stock fell $124 from its January high of $408 to a May low of $284, its P/E ratio remained in nosebleed territory. But we have never believed the P/E ratio was the be-all and end-all for valuation. Amazon is a retailer-- a very efficient retailer. When we compare stocks in the same industry, we often compare their market caps to their sales rather than their earnings. Since 2001, Amazon has generally traded at a cap-to-sales ratio of two to four times that of the average bricks-and-mortar retailer. Having fallen to just under two recently, one might say that, as an advantaged retailer, Amazon looks somewhat attractive.

But that metric misses an important change in Amazon’s business. Third-party sales (sales on where the seller is not Amazon) have grown more rapidly than Amazon’s direct business. And on those transactions, accounting rules credit only Amazon's commission as revenue. So if you buy a $100 item on from a third party, Amazon is only allowed to show about $13 of revenue, nearly all of which is gross profit. For third-party sales, Amazon is effectively functioning as the mall owner, collecting a percentage of sales as rent. Amazon earns less gross profit on that sale than an average retailer would, but it is also a much lower risk endeavor. For that reason, we think a dollar of third-party sales should be worth about the same as a dollar that Amazon sells directly.

It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales. Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%. So, relative to gross sales, Amazon's stock would have to increase 25% to be priced consistent with the very companies whose survival Amazon is threatening. On that metric, Amazon has never been cheaper.

Should Amazon sell at a discount on sales? The answer largely rests on what Amazon could earn if it wasn’t investing so heavily for future growth. For most asset heavy businesses, growth investment is primarily on the balance sheet, and is slowly expensed on the income statement as depreciation throughout its useful life. In an asset-lite business like Amazon, however, most growth spending gets directly expensed to the income statement, creating a much larger immediate reduction in income. We believe that if Amazon sharply curtailed its growth spending so that it only grew at the rate other retailers grow, it could produce similar operating margins. But we don't want them to do that. We believe that management is maximizing value by investing heavily for super-normal organic growth. So, yes, Amazon is a rapidly growing business. But at this price, we believe it is also a value stock.

As we noted last time, Morningstar analyst R.J. Hottovy couldn't agree more with Nygren's assessment, noting that Amazon has played a prominent role in the structural shift away from brick-and-mortar retail. In addition, aided by the network effect inherent in 250 million active users, and recent investments in fulfillment infrastructure, technology, and content, the firm owns one of the wider economic moats in the consumer sector and will likely remain a disruptive force within the retail, digital media, and cloud computing categories. While Hottovy believes valuation metrics like price/earnings and enterprise value/EBITDA metrics are less meaningful right now, given the impact that investments will have on near-term margins, he still thinks that Amazon warrants a premium valuation based on its wide economic moat, meaningful avenues for growth, and longer-term margin expansion potential.

Oakmark and Morgan Stanley Institutional Growth were also the primary drivers behind the high-conviction purchase of Monsanto during the period, with Nygren noting the following about his fund's interest in the stock, which was also a new-money purchase for Oakmark:

Monsanto is a leading global provider of seeds, biotechnology traits, herbicides and data analytics for farmers. We believe Monsanto is a very high quality company with above-average growth prospects and an exceptionally strong competitive position in a large and consolidated industry. In our view, Monsanto’s lead is likely to widen as successful traits are combined and as the company maintains its distribution advantages. Additionally, Monsanto’s precision agriculture platform, led by its recent purchase of The Climate Corporation, could provide significant upside and further differentiate Monsanto from its competitors, since growers are only in the early stages of using this technology to improve yields. For the past year and a half, management considered a more aggressive capital structure, and they recently announced a plan to add leverage to the balance sheet while using the proceeds for a large share repurchase program. Low corn prices, challenges in valuing their biotech pipeline and the difficulty of quantifying upside from precision agriculture have caused Monsanto to sell for materially less than our estimate of its intrinsic business value.

While not as cheap as Amazon right now, the shares are trading at about a 10% discount to our $130 fair value estimate, compared with a basic materials sector that is trading a bit closer to fair value. Morningstar analyst Jeff Stafford believes that Monsanto's portfolio of patented traits forms the basis of its wide economic moat, much in the same way that patent-protected drugs form the foundation for moats at pharmaceutical firms like Pfizer. Stafford further notes that the firm's success at selling and distributing its patented traits continues to throw off cash that can be invested each year in research and development for next-generation offerings, further continuing its cycle of successful product innovation. He views Monsanto's recently announced two-year $10 billion share repurchase program as being value-neutral, given that the stock is trading relatively close to his fair value estimate. However, he believes it will limit the potential for the firm to go out and do a value-destroying acquisition, especially with rumors floating around more recently that Monsanto was looking to buy rival Syngenta (which in his view has an inferior seed portfolio) for more than $40 billion.

As for the other high-conviction purchases, Ronald Canakaris at  ASTON/Montag & Caldwell Growth (MCGIX) had his fund involved in the purchases of both Thermo Fisher Scientific and PepsiCo, the former being a new-money purchase and the latter being a meaningful addition to an existing holding. Of the new position in Thermo Fisher Scientific, Canakaris had the following to say:

Thermo Fisher Scientific is a manufacturer of scientific instruments, consumables, and chemicals. The company has a strong merger and acquisition record, and we think the February 2014 acquisition of Life Technologies should enhance the company's depth and scale in genetic sciences and biosciences, and providing a leadership position in proteomics, genomics and cell biology. Earnings are set to accelerate due to the full inclusion of Life’s results and a buildup of operating synergies. We increased the position when the company disappointed on organic revenue growth given our belief that significant synergies from the Life acquisition will increase going into 2015.

Morningstar analyst Alex Morozov is in total agreement with Canakaris' assessment, noting that Thermo Fisher Scientific continues to strengthen its competitive positioning by broadening its product portfolio organically and through acquisitions. He thinks that the Life Technologies acquisition filled a number of product gaps for the firm, underscoring management's desire to meet every need of the company's clients as they seek to garner a larger share of wallet. Normally wary of growth-by-acquisition firms, Morozov notes that Thermo Fisher Scientific has shown a knack for integrating acquired businesses smoothly into its massive global operations. That said, he thinks that the firm is running out of acquisition opportunities given its increased size, which should give it a breather as it deleverages its balance sheet and attempts to finally get its ROICs north of its costs. Morozov also believes that the Life Technologies deal ultimately will be judged on the success of next-generation sequencing, which he sees as a multibillion-dollar opportunity. He notes, however, that this emerging field is already littered with failures and that the technology is still developing, so long-term success is far from certain. This has made it harder for Morozov to get too excited about the shares, which have, in his view, fully accounted for the synergies (and then some) expected from the Life Technologies deal. The stock has traded above Morozov’s fair value estimate for much of the year, only really getting close to being fairly valued after the firm reported first-quarter earnings in late April, which is when Canakaris looks to have been buying.

As for Canakaris' additional purchase of shares of PepsiCo for his fund, he said the following:

We expect earnings growth at Pepsi to be better than anticipated due to pressure from activist investor Trian. Increased scrutiny on the company is likely to prompt management to make significant changes to improve earnings, including perhaps splitting up the company to unlock shareholder value.

This is not the first time Canakaris has given this reason for investing more capital in PepsiCo, as he began adding more meaningfully to his stake in the snack food giant during the third quarter of last year, shortly after activist investor Nelson Peltz took a stake in PepsiCo through hedge fund Trian Partners. ASTON/Montag & Caldwell Growth has since been joined by a handful of other Ultimate Stock-Pickers that have made meaningful additions to their PepsiCo holdings. Despite the fact that Peltz has met with many of the snack food giant's largest shareholders--even winning the support of the California State Teachers' Retirement System, one of the largest pension funds in the U.S.--Morningstar analyst Adam Fleck continues to believe that the activist investor's goal of splitting up PepsiCo's snacks and beverage businesses will be difficult to achieve. The company's "Power of One" strategy is built on keeping its food and beverage operations under the same corporate umbrella, allowing the firm to take advantage of increased shelf-space leverage, overlapping direct-to-store distribution, and cross-promotional marketing activities, generating $800 million to $1 billion in synergies for PepsiCo annually. With CEO Indra Nooyi speaking out strongly against the divestiture proposals, and the company's board backing her view, Fleck thinks that the likelihood of this kind of transaction taking place is relatively slim.

With regards to Noble Energy, which was a meaningful addition for Alleghany and a new-money purchase for  Diamond Hill Large Cap (DHLAX), the managers of the latter had this to say about their purchase in their quarterly letter to shareholders:

Noble Energy, Inc. is a well-managed and well-positioned oil and gas exploration and production company. The price during the quarter provided an opportunity to establish a new position. We believe that Noble has a very attractive asset base concentrated in the DJ Basin, Marcellus, Gulf of Mexico, and Eastern Mediterranean that provides a long runway of development opportunities.

Morningstar analyst Stephen Simko believes that Noble is one of the best large-cap E&Ps in the world. He notes that very few firms are good at all facets of oil and gas production, with Noble Energy being one of them. The company's exploration program has been impressive during the last decade, with the firm being extremely adept at finding and developing high-quality conventional and unconventional oil and gas. Simko also notes that Noble has consistently met or beat guidance while staying on budget. He believes that the firm is very well-positioned to grow quickly and expects it to emerge in the second half of the decade as a far larger company generating significantly more cash flow. With the stock currently trading at 96% of Simko's fair value estimate, it is hard to get too excited about the name, but from a relative value perspective (and with the expectation of stronger growth longer-term), building up a stake at these same trading levels during the second quarter probably represented a good bit of business for these Ultimate Stock-Pickers.

Ultimate Stock-Pickers' Top 10 Stock Sales (by Investment Conviction)

Company Name Star Rating Fair Value Uncertainty Moat Rating Current Price (USD) Price/ Fair Value Market Cap (USD mil) # of Funds Selling Covidien COV 4 Low Wide 86.83 0.93 39,285 4 AIG AIG 3 High None 56.06 0.93 8,065 3 Wal-Mart WMT 4 Low Wide 75.5 0.94 242,100 3 Directv DTV 2 Medium Narrow 86.45 1.24 43,599 3 FreeptMcMRn FCX 2 High None 36.37 1.25 38,010 2 Apache APA 3 Medium Narrow 101.83 0.95 39,124 2 Abbott Labs ABT 3 Low Narrow 42.24 0.96 63,351 2 Southwest LUV 2 Very High None 32.01 1.33 21,904 2 Nike NKE 3 Medium Wide 78.56 1.08 67,980 2 Stryker SYK 3 Medium Wide 83.31 1.05 31,784 2

Data as of 08/29/14. Fund ownership data as of funds' most recent filings.

Looking at the list of top 10 sales during the most recent period, there was very little commentary from the selling managers about these particular transactions. It does, however, look like wide-moat rated  Covidien (COV) and narrow-moat Directv were sold in response to acquisition deals that were announced during the period, with the transactions still pending as of the end of last week. While  Freeport-McMoRan (FCX) and narrow-moat  Apache (APA) did a little asset-swapping during the period, it looks like they were sold more for valuation reasons than anything else. In fact, the managers at Diamond Hill Large Cap—Chuck Bath, Chris Welch, and Rick Snowdon—noted that they exited their "position in [the] oil and gas exploration & production company…as the stock price approached our estimate of intrinsic value and a more attractive opportunity emerged to invest in Noble Energy." In most of the other cases (and where commentary exists), our top managers were selling because stock prices had exceeded their valuation. About the only things that stood out were  Jensen Quality Growth's (JENSX) elimination of narrow-moat  Abbott Laboratories (ABT), about which the manager had the following to say in its quarterly letter to shareholders:

During April the Investment Committee liquidated the Fund’s position in Abbott Laboratories as the company posted an ROE% below 15% in 2013 and thus no longer qualified for our investable universe. In early 2013, the company executed a spin-off of its proprietary pharmaceutical business into a new company called AbbVie. A byproduct of that transaction was a material change in Abbott’s capital structure as the company assigned most of its legacy debt to AbbVie while retaining much of its legacy equity at Abbott. As a result, net income at Abbott declined in 2013, due to the loss of the proprietary pharmaceutical business, at a much faster rate than that of the company’s equity balance. At the date of the sale, Abbott was the smallest holding in the Fund.

In addition, Ronald Canakaris at ASTON/Montag & Caldwell Growth noted the following about his sale of wide-moat rated  Stryker (SYK), which was completely out of the fund by the end of July:

Elsewhere, we trimmed the portfolio’s stakes in Abbott Laboratories, Stryker, and Nike. We cut Abbott on inflated earnings estimates in the face of worsening foreign currency trends and potential weather-related disruptions in the medical device business. Stryker was reduced after an earnings disappointment that renewed our near-term concerns about its MAKO acquisition despite believing it to be a positive longer-term catalyst for the stock. Reductions to fiscal year 2015 earnings estimates resulted in Nike trading at a 13-year high based on its price/earnings ratio. Given Nike's peak multiple and difficult earnings comparisons for the next two fiscal quarters, the opportunity for near-term upside seemed fairly limited.

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Disclosure: Greggory Warren owns shares in the following securities mentioned above: Citigroup, Covidien, Medtronic, Mondelez International, and Procter & Gamble. It should also be noted that Morningstar's Institutional Equity Research Service offers research and analyst access to institutional asset managers. Through this service, Morningstar may have a business relationship with fund companies discussed in this report. Our business relationships in no way influence the funds or stocks discussed here.

The Morningstar Ultimate Stock-Pickers Team has a position in the following securities mentioned above: C, COV. Find out about Morningstar’s editorial policies.