Every quarter, money managers have to disclose what they've bought and sold via "13F" filings. Their latest moves can shine a bright light on smart stock picks.
Today let's look at investment advisory firm Douglass Winthrop Advisors. It's of interest because it employs a Foolish (in the good sense) "low-turnover, buy and hold strategy" -- one that has served it well. Since its inception roughly a decade ago, its equity investments have averaged annual gains of 9.1% versus 8.1% for the S&P 500 overall as of mid-year. In a recent letter to shareholders, management said: "As committed long-term investors we keep our clients invested through good days and the inevitable bad ones. While this makes for some queasy moments, our clients understand that what really matters are long-term returns net of fees and taxes."
The company's reportable stock portfolio totaled $862 million in value as of Sept. 30, 2013.
So what does Douglass Winthrop's latest quarterly 13F filing tell us? Here are a few interesting details:
The biggest new holdings are Cisco Systems (NASDAQ:CSCO) and Zimmer Holdings. Other new holdings of interest include Aflac (NYSE:AFL). Cisco stock got whacked in August when it posted fourth-quarter results featuring revenue up 6%, earnings below last year's levels, and plans to lay off about 5% of its workers, or roughly 4,000 people. It was recently downgraded from "buy" to "neutral" by MKM Partners, with analysts noting decelerating orders. Many still have faith in Cisco Systems, though, with its pile of more than $50 billion in cash and equivalents representing a lot of opportunity. Bulls also like its plans to integrate its various business lines, such as cloud computing, video communications, and mobile devices. Cisco recently announced a deal to offer wireless access via Facebook accounts. Cisco's stock yields 3% and looks appealing, with a P/E ratio near 12.
Aflac is an insurance company that derives most of its revenue from Japan, and stands to profit as the country's economic condition improves. It's also experiencing solid growth in the U.S., where its supplemental insurance is selling well. With a P/E ratio of about 9 and a yield of 2.1%, Aflac looks like a bargain. Analysts at FBR Capital agree, recently upgrading it from Market Perform to Outperform on the basis of improving fundamentals. Others like its price hikes and the reduced riskiness of its investment portfolio, though currency issues have held profits back some. Aflacs profit margins have been increasing in recent years as well.
Among holdings in which Douglass Winthrop increased its stake was Qualcomm (NASDAQ:QCOM), dominant in smartphone processors, supplying iDevices and Android devices alike with its chips. The company's third-quarter earnings featured revenue and earnings up more than 30% each, with management upping projections. Bulls like its expansion into health care and telemedicine and its early investments in big data. (Qualcomm is even working on chips inspired by brain processes.) Bears worry about competition, though, and analysts at Bank of America recently downgraded Qualcomm from "buy" to "neutral," expecting a slowdown in smartphone growth. Qualcomm hiked its dividend by 40% earlier this year, and its yield is now at 2%.
Finally, Douglass Winthrop's biggest closed positions included PotashCorp (NYSE:POT) and Expeditors International. Fertilizer giant Potash is appealing, given our growing global need for food, and some see its ultimate success as almost inevitable. Bulls like PotashCorp's low-cost structure and solid profit margins. Still, it's vulnerable to fertilizer prices and to the state of developing economies, and these have depressed the stock lately. New competition may come from BHP Billiton, which is building a potash mine in Canada. PotashCorp carries significant debt, but it's also generating more than a billion dollars in free cash flow annually. It recently yielded 4.4%, and its dividend has been hiked 25% this year and some 700% over the past few years.
Another closed positions of interest is Solar Capital (NASDAQ:SLRC), which.offers a hefty dividend yield of 7.2%, though its dividend commitments are currently outstripping its earnings, which is a red flag. It's organized as a business development company, and while it offers shareholders a chance to participate in private-equity investments, it's also been posting shrinking free cash flow in recent years.
We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing. 13F forms can be great places to find intriguing candidates for our portfolios.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Qualcomm and Solar Capital. The Motley Fool recommends Aflac, Bank of America, Cisco Systems, and Facebook. The Motley Fool owns shares of Bank of America, Expeditors International of Washington, Facebook, PotashCorp, Qualcomm, and Zimmer Holdings. 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.