In Steal Like an Artist, author (and artist) Austin Kleon argues that nothing is completely original--we learn by copying. Kleon isn't suggesting that plagiarism is OK. Rather, he tells readers that they should collect good ideas and allow themselves to be influenced by them.
We couldn't agree more. When it comes to investing, good ideas can come from a variety of places. The trick is taking these tips, researching them further, and deciding whether these investments are good choices for your portfolio based on your personal parameters.
In fact, we frequently look beyond our own analyst teams for investing ideas. For instance, our quarterly Ultimate Stock-Pickers series meshes stock picks from a roster of great investors with Morningstar's own recommendations. We also regularly peek into Berkshire Hathaway's portfolio, too.
Today, we're examining the holdings of highly rated, concentrated large-cap funds FMI Large Cap FMIHX, Loomis Sayles Growth LGRNX, and Parnassus Core Equity PRBLX, all which have at least one share class that earns a Morningstar Analyst Rating of Gold, as well as AMG Yacktman Focused YAFFX, Jensen Quality Growth JENSX, Oakmark Select OAKLX, and Sound Shore SSHVX, with at least one share class rated Silver.
Why focus on concentrated funds? These managers invest in fewer stocks--Oakmark Select holds the fewest stocks, at 26, while AMG Yacktman Focused owns the most, at 53--and are therefore choosier about what they buy. And when they buy, they have high conviction. Moreover, we've limited our list to Gold- and Silver-rated funds, meaning that these managers are pretty good at what they do.
Despite the fact that these managers ply a variety of different strategies--the Loomis Sayles fund lands in the large-growth Morningstar Category; Yacktman and Sound Shore can be found in large value; and FMI, Jensen, Oakmark, and Parnassus are at home in large blend--the portfolios have several holdings in common. The exhibit below includes the eight stocks that are owned by three or more of the funds, how many of the funds own each stock, and and the current Morningstar Rating for each.
Alphabet GOOGL is the most commonly held stock among these managers. It appears in six portfolios. (The exception: AMG Yacktman Focused.) Clearly, Alphabet in particular and the others included here are fine ideas to "steal." But be sure you steal them at the right price: Half of the stocks in common are currently fairly valued or overvalued according to our metrics. We think these are stocks to keep on your watchlist, for now.
Here's what our analysts have to say about the three stocks on the list held by four or more of the funds.
"Alphabet dominates the online search market with Google's global share above 80%, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in the search market. We foresee YouTube contributing more to the firm's top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside.
"Google's ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue, which we think will continue to grow at double-digit rates after the pandemic and during the next five years. The firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers. Adoption and usage of mobile devices has been increasing. The online advertising market has taken notice and is following its target audience onto the mobile platform. We have seen Google partake in this on the back of its Android mobile operating system's growing market share, helping it drive revenue growth and maintain its leadership in the space.
"Among the firm's investment areas, we particularly applaud the efforts to gain a stronger foothold in the fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth and creating more operating leverage, which we expect will continue. Regarding Alphabet's more futuristic projects, although most are not yet generating revenue, the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet's autonomous car technology business, Waymo, is a good example. Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years."
--Ali Mogharabi, senior analyst
Booking Holdings BKNG
"While COVID-19 continues to impact near-term travel demand, we see Booking exhibiting solid financial health. Further, we expect Booking's global online travel agency leadership position to increase over the next decade, driven by a healthy position in Asia-Pacific, continued leadership in Europe, and an expanding presence in vacation rentals, restaurant bookings, experiences, flights, and payments, all of which are backed by leading marketing and technology scale.
"Booking has built a leading network (source of its narrow moat) of hotel properties and other services, which drives an increasing user base. We see this network effect continuing to expand in both developed and emerging markets, as well as vertical markets such as rentals, attractions, flights, and payments (where it looks to focus 2022 investment), resulting in a full connected trip offering. In developed markets, replicating Booking's leading network in Europe is proving costly and time consuming for key competitors, given around 60% of all hotels in the region are small boutique establishments. In emerging markets, the firm is expanding its presence in China with its Ctrip and Meituan-Dianping partnerships, and in its own Booking.com and Agoda.com platforms, which is crucial. This expanding network positions Booking well for the increasing global shift to booking via mobile applications. Booking.com is a top-10 travel iOS application in 152 markets versus around 86 for Airbnb ABNB and 20 for Expedia EXPE, according to App Annie on Feb. 23, 2022.
"Focused entry from Google, Meta Platforms FB, Alibaba BABA, Amazon.com AMZN, and others could double the current handful of players that have dominant scale, leading to a meaningful impact on profitability. That said, replicating Booking's network would require significant time and expense, and we expect most of the aforementioned operators to deploy a metasearch model (don't control hotel relationships) versus directly competing against Booking's OTA model (control hotel relationships)."
--Dan Wasiolek, senior analyst
"Since taking over as CEO in 2014, Satya Nadella has reinvented Microsoft as a cloud leader. In our view, Microsoft has become one of two public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Additionally, Microsoft embraced the open-source movement and has largely transitioned from a traditional perpetual license model to a subscription model. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins.
"We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $30 billion business, it grew at a staggering 50% rate in fiscal 2021. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud creating seamless hybrid cloud environments. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touch point for an Azure move. Azure also is an excellent launching point for secular trends in artificial intelligence, business intelligence, and "Internet of Things," as it continues to launch new services centered around these broad themes.
"Microsoft is also shifting its traditional on-premises products to become cloud-based software-as-a-service solutions. Critical applications include LinkedIn, Office 365, and Dynamics 365, with these moves now beyond the halfway point and no longer a financial drag. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years."
--Dan Romanoff, senior analyst