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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.
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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