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This Is One Cheap Stock

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When somebody tells me that some professional investor is doing something, my first question is always, "Why should I care?" There are a lot of professional investors out there, and a great many of them appear to be jobbers who essentially aim to avoid embarrassment by matching the S&P 500's returns.

For many investors, Tweedy, Browne may not immediately ring any bells. The firm isn't a household name like Warren Buffett, John Paulson, or George Soros. However, Tweedy, Browne's two longest-running mutual funds (dating to 1993) have both topped their respective benchmarks -- one by nearly double. And when Buffett penned "The Superinvestors of Graham-and-Doddsville" in 1984, Tweedy, Browne (then a partnership) was included in that group of superinvestors. To this day, it's still Benjamin Graham's value-investing approach to the markets that flows through the veins of investors at Tweedy, Browne.

So when the folks at Tweedy, Browne speak, I tend to listen.

An eye for value
As noted above, Tweedy, Browne is a value-seeking investor, and right now it is finding value among the large-cap portion of the market:

Our Fund portfolios continue to be populated in large part by big, globally diversified and dominant businesses with strong competitive positions, often producing a plethora of moderately priced products for a growing middle class around the world. While these companies emerged from the crisis relatively unscathed and have participated in the market's advance, we believe that they continue to represent good value in the market and trade at reasonable multiples of more predictable cash flows.

It's a view that seems almost too simple to actually work -- that is, that some of the largest, best-known companies also present some of the most compelling investment values -- but the numbers certainly seem to back it up. I've been on the same page as Tweedy, Browne on this and have had my eye on large caps as their valuations have become increasingly attractive after a long period of overvaluations.

As a result of this focus on globally diversified large caps, Tweedy, Browne has many of its largest positions in names that are instantly recognizable around the world.


Market Cap

Known For

2011 Price-to-Earnings Ratio

Philip Morris International (NYSE: PM  ) $105 billion Marlboro cigarettes 13.2
Total SA (NYSE: TOT  ) $136 billion Oil 8.8
Diageo $48 billion Johnnie Walker, Smirnoff, Captain Morgan, Jose Cuervo, and Guinness 15.2
ConocoPhillips (NYSE: COP  ) $105 billion Oil 10.7
Johnson & Johnson (NYSE: JNJ  ) $167 billion Band-Aid, Tylenol, Listerine, Neutrogena, many other consumer and professional health care products 12.5

Source: Capital IQ, a Standard & Poor's company, and Yahoo! Finance.

That cheap stock
The stocks in the table above are all pretty cheap. I personally own a few of them -- Philip Morris International, Total, and J&J -- and though it already held large positions in these stocks, Tweedy, Browne has been adding to its stakes in Total, Diageo, and J&J. But none of these was the stock I was referring to in the title of this article.

The stock that I was referring to was a brand new addition to Tweedy, Browne's stable during the fourth quarter. Tweedy, Browne writes:

Among the more noteworthy new buys was [Lockheed Martin (NYSE: LMT  ) ], the US-based defense contractor. ... Lockheed Martin is the world's largest defense contractor. It has what we think is a highly desirable product mix (F-35s, missile defense, cyber security) and limited exposure to supplemental defense spending, which will most likely be under pressure going forward due to government budget issues. At purchase, it was trading at roughly 10 times earnings, with a sustainable free cash flow yield excluding pensions of 12 to 13%. It had a dividend yield of 4.2%, and has a record of returning another 1-2% (per quarter) to shareholders in the form of stock buybacks. The dividend has increased by 10% or more over the last eight consecutive years, and the payout ratio is a conservative 42%.

In fact, the entire defense sector has been pretty beaten down by concerns over possible U.S. budget constraints -- while Lockheed currently trades at 11.6 times forward earnings, Raytheon (NYSE: RTN  ) has a forward P/E of 10.1, Northrop Grumman's is at 11.1, and General Dynamics (NYSE: GD  ) changes hands at 10.6 times forward earnings. The key, however, as Tweedy, Browne points out, is each company's exposure to the most at-risk portions of the defense budget.

Lockheed's stock has seen a sharp pop since the beginning of the year, so it's not nearly as cheap as when Tweedy, Browne was picking up its shares. However, it's still hard to call the stock expensive, and the 3.8% dividend is nothing to sneeze at.

I've had my eye on Lockheed in the past, and thanks to Tweedy, Browne, it's back on my radar.

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Johnson & Johnson is a Motley Fool Inside Value pick. Philip Morris International is a Motley Fool Global Gains pick. Diageo, Johnson & Johnson, and Total are Motley Fool Income Investor choices. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Diageo, General Dynamics, Johnson & Johnson, Lockheed Martin, Northrop Grumman, Philip Morris International, and Raytheon. Motley Fool Alpha owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Philip Morris International, Total, and Johnson & Johnson, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (20) | Recommend This Article (129)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 5:45 PM, TMFBreakerRob wrote:

    Good article, Matt.

    If the Feds get serious about deficit reduction, many favored programs are likely to be axed. While I think missile defense and cyber security are likely to be safe, I wonder about the F-35. Not saying its not a good plane, just thinking that they could cut back on the number to be built or cancel it altogether.

    That would be a problem and is a significant question mark (for me) in what is otherwise a pretty attractive idea.

  • Report this Comment On February 02, 2011, at 9:25 PM, Merton123 wrote:

    Great article Matt

    The market is saying that they don't believe that Lockheed Martins earnings growth potential is good per the reason that you outlined in your article. Does Tweedy Browne know something that we don't? I prefer their Glaxo Smith Kline GLX ADR holding in three of their four mutual funds. Glaxo basic research may save them from the low p/e doldrums that the other pharmecutical firms are suffering (e.g., Merk and Phizer).

    My first investment screen is the DOW 30. My second investment screen is the holdings of Tweedy Browne. That is why Matt's article resonated with me since we both use a similar method to identify good investment possibilities. I have a fulltime job so can't spend a lot of time researching a lot of companies therefore rely on Tweedy Browne research and Dow 30 universe to narrow the field of investment prospects. This year I didn't see any interesting prospects that met both investment criteria which had in my mind pontential of moving from a low P/E ratio stock to a high P/E ratio stock so used this years Roth IRA contribution amount to purchase FOOLX mutual fund.

  • Report this Comment On February 02, 2011, at 11:19 PM, Langalier wrote:

    Lose the advertising that blocks the message I wasn't able to read.......

  • Report this Comment On February 02, 2011, at 11:32 PM, Citzenkane wrote:

    Same here. Can't read right side of the article.

  • Report this Comment On February 03, 2011, at 4:57 AM, watchfrogsboil wrote:

    Raytheon and Lockheed Martin to Bank $3.5 Billion from "Space Fence" Boondoggle

    According to the POGO Federal Contractor Misconduct Database (FCMD), since 1995 Lockheed Martin has been charged with committing over 54 instances of fraud and other white collar crimes while Raytheon was charged with 21. Despite that, the U.S. Air Force has awarded Lockheed Martin and Raytheon contracts to provide designs for a "space fence". So far, each has been obligated $20 million of the potential $107 million contracts, the Air Force said. The Navy originally was heading up the space fence project but handed it over to the Air Force in 2004. The military expects to spend $3.5 billion on the project, which is expected to be completed in 2015.

    U.S. total debt $55.6 trillion, U.S. federal debt $14.1 trillion, U.S. federal deficit $1.5 trillion, U.S. dollar rapidly losing world reserve currency status, as U.S. politicians bought and paid for by multinational corporations (legalized by Citizens United vs. FEC) cut education, close schools, convert asphalt roads to gravel and accelerate America's descent into oblivion so they can pay Lockheed Martin, Raytheon and other greed- and graft-infested government contractors billions for Rube Goldberg defense systems and myriad non-defense boondoggles as unnecessary, unaffordable and unjustifiable as our unending wars for oil and profit:

  • Report this Comment On February 03, 2011, at 6:18 AM, Merton123 wrote:

    Wow - from reading the various prior postings an investor can easily become overwhelmed with the various perspectives being broadcasted about the various stocks. Tweedy Browne by focusing on slow growth stocks per BigPlayers post has been able to outperform the majority of mutual funds per Matt's article. Even Warren Buffet acknowledges Tweedy Browne as a Super Investor per Matt's article. I believe that the secret to Tweedy Browne success is their ability to filter out all the noise and follow a disciplined approached to investing. They underperform the market until an inevitable bubble occurs every 10 years and afterwards they come up smelling like roses.

  • Report this Comment On February 03, 2011, at 11:28 AM, ziq wrote:

    Due to the font size, for some reason this article is barely readable in Mozilla Firefox since it gets cut off on the right by the ads. It's OK in MS Internet Explorer, which renders the text in a reasonable size font.

  • Report this Comment On February 03, 2011, at 3:20 PM, earlyseller wrote:

    Having served my military obligation as a "Weekend Warrior" from 1955 to 1961, I still feel qualified to put in my licks against "wasteful military spending" the oxymororn of all time. During my service at Lackland AFB in San Antonio TX I was 'guarding' a shack containing M1 rifles with a 2 foot piece of a sawed off broomstick. Whereas the next guardpost was staffed by an "armed" dude at the officers' swimming pool. Since we now have effective UMAs (Unmanned aircraft) e.g. why buy more F35s? And all the associated political payoffs?

    So I refrain from the military-industrial-political complex as an Eisenhower citizen investor.

  • Report this Comment On February 03, 2011, at 3:21 PM, eremmell wrote:

    W/ regards to defense contractors to invest in, I recommend LLL and possibly TCCO.

  • Report this Comment On February 03, 2011, at 7:26 PM, 2beewise wrote:

    Re: On February 03, 2011, at 4:57 AM, watchfrogsboil wrote:

    Raytheon and Lockheed Martin to Bank $3.5 Billion from "Space Fence" Boondoggle...

    Congratulations!!! I couldn't agree more. I applaud your discussion and your values. Thanks for a highly informed expos'e of a financially debilitating issue.

    Gratefully, Paul

  • Report this Comment On February 04, 2011, at 2:37 PM, MarkGillCPA wrote:

    It was cheap last Sept-Oct when you could buy LMT for $67. Now, at $81, 20% higher, not so much.

  • Report this Comment On February 04, 2011, at 4:51 PM, SPRINGBROOK1222 wrote:

    One of the "Best Buys" for one of you - sometimes both - has for many months been

    and continues to be YONGE.

    What puts this so high on our value list?

    Is It is not performing well.

    Fred B.

  • Report this Comment On February 04, 2011, at 7:26 PM, whyaduck1128 wrote:

    I had the same problem with Firefox, but "solved" it by clicking on Print, then just reading the article.

  • Report this Comment On February 05, 2011, at 9:11 AM, wgs404 wrote:

    I use Mozilla Firefox 5.0 and have no problem reading the article.

  • Report this Comment On February 05, 2011, at 9:41 AM, herbalix wrote:

    Re: On February 03, 2011, at 4:57 AM, watchfrogsboil wrote:

    Raytheon and Lockheed Martin to Bank $3.5 Billion from "Space Fence" Boondoggle...

    I can not add much to what 'beewise' already said. I am grateful to watchfrogsboil for the info he gave us and i only wonder how little response to it he got from the fools community. That really is a sad statement about who we are. We simply do not care about who this people are in which we are going to invest as long as we can have a bit of profit from the sad things they orchestrate. What kind of fools are we really?

  • Report this Comment On February 05, 2011, at 11:33 AM, bohemian100 wrote:

    Motley Fool can say we are not your spiritual advisors but somewhere we fools have to say dont give me killer stocks like cancer causing Phillip Morris, mass murder merchants like Raytheon an Lockheed Martin,so we can sing" What kind of fool am I" and be able to to answer Not too bad thank you


  • Report this Comment On February 05, 2011, at 1:52 PM, Gr8Writer wrote:

    I have to agree with bohemian100. I wouldn't invest in Phillip Morris if you paid me to. I just wouldn't be able to sleep well at night. How well do you sleep, Matt?

  • Report this Comment On February 06, 2011, at 3:56 AM, beastofbodmin wrote:

    To those of you complaining about adverts geting in the way of the story.

    1. That's what they are there for :)

    2. Install an ad blocker. Your web pages will load faster. They exist for Firefox and for IE.

  • Report this Comment On February 07, 2011, at 12:51 PM, eldoradon wrote:

    When you advertise a cheap stock I open the site only to find out its not cheap and just another come on to go to another site on your web page. Come on with the come ons!!!!

    I don't have time for your games .Canecl my subscription

  • Report this Comment On February 08, 2011, at 5:40 PM, CaptainKenny wrote:

    I am also disappointed about the marketing ploy, but if you really beleive that defense contracting sector is going up in the near future you guys have lost your mind.

    Epect all of these to drop in market share with the budget cuts to come.

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