All fund managers have now filed a list of their U.S. stock holdings with the SEC, enabling you to see how they reshuffled their portfolios during the third quarter. However, not all of them are equally worthy of your attention; the trick is to identify a subset of outstanding investors and to track their buys and sells. When multiple funds open a new position in the same stock and do so in size, that's a pick that is likely to turn into a real winners.
The ultimate stock pickers
Research firm Morningstar tracks what it calls the "Ultimate Stock-Pickers." The list of twenty-six star managers includes pillars of the value investing community Berkshire Hathaway CEO Warren Buffett and William Browne of Tweedy, Browne (Ben Graham's erstwhile broker), as well as younger superstars from the same investing tradition, such as Bruce Berkowitz of Fairholme Funds.
Here are their top 10 new money purchases in the third quarter (in descending order):
Share Price Change Relative to Q3 Average Price
|Anheuser-Busch Inbev||Consumer Staples||22.5%|
Based on approximately three-quarters of filings from the group of 17. Sources: Morningstar and author's calculations based on data from Capital IQ, a division of Standard & Poor's.
Of these ten stocks, the three that remain closest to their average price during the third quarter are Medtronic, American Express and Hewlett-Packard. All other things equal, we'd expect them to be the most undervalued; sure enough, all three stocks are in the cheapest half of our list relative to Morningstar's estimates of intrinsic value. Here is what some of the super-investors had to say about them:
In his third quarter investor letter, Don Yacktman and offered a concise rationale for adding of Medtronic to his portfolio:
These [medical device company] stocks have generally been under pressure due to concerns about the changes in the American health care system as well as a medical device excise tax that is due to begin in 2013. The medical device companies we own sell products that are necessary for treating an aging population around the world and generally posted solid growth through the recession. All of the companies sell at low multiples to cash flow and earnings.
However, David Carr of RS Capital Appreciation (formerly the Oak Value Fund), who used to own Medtronic shares, closed out the position in the second quarter:
Medtronic continues to demonstrate growth and profitability as an overall company – yet the mix of the business is still at least 1/3 represented by the Cardiac Rhythm Management (ICDs) segment. Medtronic continues to spend aggressively to develop new products. While we are confident that the company will successfully commercialize its R&D pipeline over time, we have concluded that the timeline for this realization has been extended. In searching for sources of funding to continue to build the Fund's exposure to Teva Pharmaceutical, we eliminated the Medtronic position.
It's worth noting that the stock of generic drug manufacturer Teva Pharmaceutical Industries'
Ron Canakaris added American Express to his Aston/ Montag & Caldwell Growth Fund in the third quarter, ending the period with a 3% position. Kanakaris wrote to his investors that:
American Express has experienced a rapid recovery in credit-loss rates, slowing shrinkage in its loan portfolio, and more robust levels of capital and funding. Despite modest returns during the quarter, we think the firm could be a beneficiary of new regulations for interchange rates on debit cards.
However, he appears to have lost some conviction with regard to the stock already, having substantially reduced the position in the space of a month. Indeed, between Sept. 30 and Oct. 30, American Express went from being 3% of the portfolio to just 1%.
A value investing legend, Bill Miller (who isn't one of the Ultimate Stock-Pickers), made a highly compelling case for Hewlett-Packard two months ago:
Hewlett-Packard has $15bn of cash on its balance sheet. It will generate $10bn of free cash this year... so HP could take 100% of its free cashflow and pay it out as dividends. While they would never do that, if they did the stock would have a 10% yield on it. Can you think of any companies out there with a 10% yield and can grow? So where would it trade? It might trade to a 5% yield.
Here's the context: Hewlett hasn't raised its dividend since 1998, so an increase in the dividend is already long overdue. Note that when Miller said this, Hewlett's stock price was around $39. The stock has hardly moved since then, which suggests he believes it could be worth nearly twice its current price.
Another tool for better investing
Most investors don't keep tabs on their companies' fundamental value. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home run stocks that provide the market's best returns.
We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.
Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. American Express is a Motley Fool Inside Value recommendation. The Fool owns shares of Devon Energy, Medtronic, and Teva Pharmaceutical Industries. 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. The Motley Fool has a disclosure policy.