How would you like Wall Street's "smart money" to tell you which stocks to buy, for free?
It's not a trick question. Free advice is easily available from some of the top mutual fund managers, for two simple reasons:
1) Mutual funds have to report their latest holdings.
2) Using these reports, experts at Morningstar regularly round up the market actions of the best of the best managers, a group it calls Ultimate Stock Pickers.
Morningstar's efforts feature heavy hitters at 26 funds who have been investing for decades. They include seasoned veterans like Bruce Berkowitz at the Fairholme (FAIRX) fund, Theo Kolokotrones at Vanguard Primecap (VPMCX), and Donald and Steven Yacktman at the Yacktman (YACKX) fund -- all up an average 10% to 11.4% each year over the past 10 years.
That's 2.5 to 3.8 percentage points a year better than the Standard & Poor's500 Index ($INX), which is even more impressive when you consider that most fund managers regularly lag the market.
Morningstar's Ultimate Stock Pickers recently favored Apple (AAPL), hit by big selling last year, Berkshire Hathaway (BRK.B), managed by investor great Warren Buffett, and several other names I'm going to tell you about in this slide show.
Morningstar highlights new buys and "high-conviction" purchases that create or add to large positions. A catch here is that funds report holdings only once a month or once a quarter. That means the heavy hitter purchases might be dated.
To address this, I'm featuring stocks favored by this panel for which insiders have recently bought shares, as well as those with at a rating of at least four stars at Morningstar -- both indications of reasonable valuation. The insider-buying patterns also partly explain why so many of these stocks have appeared in my stock newsletter Brush up on Stocks in the past year or two as well as in this column, since insider buying is an indicator I follow closely. Click ahead for a look at the seven stocks that made the cut.
Apple (AAPL) sold an impressive 31.2 million iPhones in the second quarter, or 20% more than it did a year ago. At this rate, it seems like everyone in the world who wants an iPhone should have one soon! So where will Apple go next to keep growth alive?
"Our key catalysts will always be new products and new services," Apple CEO Tim Cook said in a July conference call with investors. But with product and marketing genius Steve Jobs gone, I believe Apple could have trouble rolling out the next big thing.
I was negative on Apple in early September 2012 in my investment letter Brush up on Stocks, as Apple approached $700 a share, just before the big slide to less than $400 by April. I still question Apple's future.
But the smart money fund managers could hardly disagree with me more. Six of them have been buying this year, including three who established new positions, making Apple the top Ultimate Stock Pickers purchase as of the end of May.
New positions were established by the Diamond Hill Large Cap (DHLAX) and Parnassus Equity Income(PRBLX) funds, both of which beat the market or competing funds by 2 to 2.7 percentage points a year over the past 10 years. In a letter to shareholders, Diamond Hill managers Chuck Bath, Bill Dierker and Chris Welch say they think my market saturation concerns are more than reflected in the stock price. Meanwhile, managers at Alleghany (Y), an insurance company that invests in stocks, and Oakmark (OAKMX) have increased their Apple positions in a big way. "Despite its high growth rate, Apple sells at 8 times earnings when you strip out cash," says Oakmark's Bill Nygren, a value manager. His fund has beaten competitors by 5.4 percentage points over the past five years with 12.8% annualized returns.
At least two Ultimate Stock Pickers agree with me, though. Both Hartford Capital Appreciation (ITHAX) and Aston/Montag & Caldwell Growth (MCGIX) have been big sellers of Apple.
The insurance company Berkshire Hathaway (BRK.B) faces two main problems. First, it is so big that it's tough to find investments that can move the needle. Second, the two investing geniuses who have made Berkshire what it is, Warren Buffett and Charlie Munger, are octogenarians.
These factors don't seem to bother the smart money in mutual funds, though. Berkshire Hathaway is the seventh largest holding among them, and the 17th most widely held stock among Morningstar's Ultimate Stock Pickers. It's the second largest position at Sequoia (SEQUX), a five star-value fund whose 12% annualized returns over the past five years beats the S&P 500 and competitors by 3.5 and 4.6 percentage points a year, respectively. It is also a large holding at FMI Large Cap (FMIHX) which has posted 10.2% annualized returns over the past 10 years, or 2.6 percentage points a year better than the S&P 500.
What's to like here? I've been suggesting this one in my newsletter Brush up on Stocks since early 2011 in the $68-$83 range, and in a July 2011 MSN Money column at around $76, because it looked to cheap. Now, with the stock at $116, it still looks interesting. Berkshire's insurance businesses -- Geico, General Re and Berkshire Hathaway Reinsurance -- are the most important part of Berkshire Hathaway, and they are all giant, established companies.
Berkshire's non-insurance businesses, such as the railroad Burlington Northern Santa Fe, MidAmerican Energy, Dairy Queen and See's Candies, typically have the kinds of high barriers to entry that Buffett likes to see. And they are all managed on a highly decentralized basis, meaning Buffett doesn't have much to do with them.
As for Buffett's tenure, he's still going strong and may well do so for several more years. He says he has already picked someone to replace him as CEO. And he has brought in capable managers Todd Combs and Ted Weschler to handle investments.
Philip Morris International (PM) has been hit by a strengthening U.S. dollar (which reduces foreign earnings when translated back to U.S. dollars), an economic slowdown in Europe and tax increases in Russia and the Philippines. So the company has been cutting estimates, and its stock has gone nowhere this year despite a strong rise in the market.
None of this bothers the smart money managers at mutual funds. Philip Morris is the 14th most widely held equity among Ultimate Stock Pickers, and it was the third largest new money purchase as of the end of May.
Star managers at the Oakmark Equity & Income (OAKBX), Aston/Montag & Caldwell Growth, Columbia Dividend Income (LBSAX) and Mutual Shares (TESIX) funds are big holders. Managers at the Diamond Hill Large Cap and Hartford Capital Appreciation funds established new positions earlier this year.
What do they see in Philip Morris? Much the same as what I saw in this stock when I suggested it to MSN Money readers in June 2008 at around $50 a share. The company manages the foreign sales of popular brands like Marlboro, Parliament, L&M and Chesterfield, so it has solid pricing power, which it used in the first half of the year to reap more revenue from smokers. These brands also give it good exposure to emerging markets, where a growing middle class is trading up to more expensive cigarette brands. Next, Philip Morris is a cash machine, so it can pay a nice 3.8% dividend yield and continue to buy back a lot of stock.
As for the problems, while a weak dollar affects reported earnings, it doesn't really hurt the underlying business. Further, Europe won't stay weak forever, and Philip Morris has actually been increasing market share there during the slowdown. One question mark here is electronic cigarettes, which deliver nicotine via a vapor-producing tube. It's still too early to know whether these will take off. Meanwhile, Philip Morris says it's working on its own version, which it might start selling in 2016 or 2017.
Recent insider buying at $89 a share, or around current levels, supports the bullish case for this stock
The retailer Kohl's (KSS) took a tumble at the end of last year to around $42 from $52. As it recovered in the first several months of this year, smart money fund managers were moving in. It was the 13th biggest high-conviction purchase and new money purchase this year among Morningstar's Ultimate Stock Picker team. Alleghany made a new-money purchase and Oakmark added to its position.
Now Kohl's stock trades higher, at around $53. But it still carries a four-star rating at Morningstar, and an insider recently bought as high as $50.89, suggesting it is still a good value. After all, despite the rebound this year, Kohl's still hasn't gone back to the $54-$55 range it saw in October and November, so it is still seriously lagging the market. The S&P 500 is up 19.4% since Nov. 1.
What might drive Kohl's higher? The retailer has strong private and exclusive brands like Simply Vera by Vera Wang and kitchen gadgets sold under the Food Network brand. And it has convenient locations. So it could do well as consumer strength rebounds and as we move into the back-to-school season. Medium term, there's still room to roll out new stores. Kohl's also has a strong balance sheet and low cost structure that nets high operating margins and thus lots of free cash flow, which supports a 2.6% dividend yield.
Like me, the smart money at mutual funds has been thinking recently that energy is a beaten-down sector worth buying. (To see my recent take on this, see "13 energy stocks ready to roll.")
Apache (APA) ranked eighth recently on the list of high-conviction purchases among smart money mutual fund managers. New positions showed up at the end of June in the Dodge & Cox Stock (DODGX) fund, which is up 37.75% in the past year to beat competitors by 7.7 percentage points, and in Oakmark. Apache is also a big position at the Diamond Hill Large Cap and Mutual Shares funds.
What's to like here? I suggested this one in my newsletter Brush up on Stocks in late April at around $71 a share. Even though it is up 14% to around $81, it still looks attractive. Recent insider buying in the $73 to $76 range has reinforced the bull case here for me on this one, as did insider buys around current levels late last year.
Apache has been purchasing energy assets in the North Sea, the Gulf of Mexico and elsewhere from companies such as Exxon Mobil (XOM), BP (BP) and Devon Energy (DVN), and via a recent merger withMariner Energy. In the United States, it has big holdings in many of the right places, with sizable positions in the Permian Basin and the Anadarko Basin and along the Gulf Coast in Louisiana and Texas. All of this gives the company development and exploration opportunities that should play out over the next several years.
Apache also recently sold some Gulf of Mexico energy holdings, which raises capital to support share repurchases and reduce debt, says Morningstar's' Mark Hanson.
Here's another cheap energy name the smart money at mutual funds has been snapping up in the energy sector weakness. National Oilwell Varco (NOV) was recently the fourth largest new-money purchase among Ultimate Stock Pickers tracked by Morningstar; it was also the 24th largest purchase by investment conviction.
The energy equipment company showed up as a new purchase in late June at Bill Nygren's Oakmark as well as Oakmark Equity & Income. The latter fund, managed by Clyde McGregor and his team, beat competitors by 2 percentage points a year over the past 10 years, with 8.4% annualized gains. The company was also a new add by Parnassus Equity Income as of the end of April, another fund that beat competitors by 2 percentage points a year over the past 10 years.
National Oilwell Varco shares have fallen to around $71 from more than $85 in September. But it is still the top equipment company for both onshore and deep-water drilling. This company's equipment is on 90% of the world's oil rigs, more than half of which will have to be replaced or upgraded in the next several years, according to Morningstar's Stephen Ellis.
Health care is another sector the smart money has been buying aggressively this year. Among the health care names that have been snapped up, my pick is Valeant Pharmaceuticals International (VRX). I first suggested this one in Brush up on Stocks at around $46 in December 2011, and it is now a double at around $92. I still like it, and so do Morningstar's Ultimate Stock Pickers.
Valeant was recently a new addition to the Morgan Stanley Focus Growth (AMOAX) fund, which is up 30% in the past year to beat competitors by 5 percentage points. And it is the largest holding at Sequoia, accounting for 16% its total stock holdings at the end of the March. Sequoia managers Bob Goldfarb and David Poppe tend to buy positions for the long term (their annual portfolio turnover is normally below 25%, which is low for a mutual fund). This is probably because they like companies with sustainable competitive advantages and talented management, according to Morningstar fund analyst Kevin McDevitt.
And that's what we see at Valeant Pharmaceuticals. Valeant, which has important products in dermatology, neurology and branded generics, as well as several drugs in development for pain and dermatological problems, is run by Michael Pearson, who was the head of pharmaceutical consulting at McKinsey. This may explain why Valeant's acquisition strategy has been working. Valeant has carried out a flurry of acquisitions since Pearson took over in February 2008, and the company has grown sharply as a result. The stock is up more than 600% since then. A great move, but Valeant should continue to be a nice Rx for stock portfolios.
At the time of publication, Michael Brush did owned shares of Philip Morris, and he has suggested shares of Philip Morris, Berkshire Hathaway, Apache and Valeant Pharmaceuticals International to subscribers ofBrush up on Stocks, his investment newsletter.
No comments:
Post a Comment