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Investing Specialists

More Buy Ideas from Our Ultimate Stock-Pickers

We found some nuggets in the most recent holdings, purchases, and sales of our top managers.

By Greggory Warren, CFA | Stock Analyst

After the carnage of the second half of 2008, the first quarter of this year seemed a bit tamer. While the market (as represented by the S&P 500 Index (SPX)) did decline nearly 20% during the first two months of the year, it rebounded close to 10% during March and closed out the quarter down less than 12%. Compared with a more than 20% decline in the fourth quarter (and a nearly 30% decline during the second half of last year), this was a marked improvement. With the market's March rally extending into April and May, the index increased another 15%, putting it back where it was at the beginning of the year. Against this backdrop, our managers were once again actively buying and selling securities, either adding to or subtracting from their existing positions, or building positions in new names.

Given the dramatic rise in the markets over the last couple of months, there were few investable ideas left in the Ultimate Stock-Pickers' list of top purchases. As such, we've chosen to take a deeper look at the top 10 holdings of the managers in our Investment Manager Roster, where we've found more than a handful of stock ideas that our analysts currently believe are buyable. We'll follow that up with insight into some of the more interesting things that popped up in the top purchases and sales.

No Change in Top Holdings, but Many Names Still Buyable
There were no changes to the 10 stocks that made up the top holdings of the managers we follow, even after we added  Fairfax Financial (FFH) to the Investment Manager Roster. As you may recall, we talked about Fairfax, which has put up a fairly remarkable track record of investment performance over the years, in a recent article highlighting the Canadian property and casualty insurer's large purchase of U.S. equities in the fourth quarter of 2008. Based on a quick glance through its most recent 13-F filing, it looks like Fairfax was busy again during the first quarter of this year, eliminating positions in companies like  Abbott Laboratories (ABT) and  Progressive (PGR) and using the proceeds to dramatically increase its stakes in both  US Bancorp (USB) and  Wells Fargo (WFC) (moves that our analyst Chris Blumas will talk about in more detail in an upcoming article on Fairfax).

We decided to add Fairfax to the Investment Manager Roster due to its strong track record of investment performance, as well as the fact that as an insurance company it is not impacted by investor redemptions during poor market environments, allowing it to put cash to work more freely than most mutual fund managers. It also doesn't hurt that Fairfax has been a fairly active purchaser of stocks over the last six months, providing us with additional investment ideas to follow up on as we sift through the holdings, purchases, and sales of our top managers.

 Ultimate Stock-Pickers' Top Holdings

Fair Value
Price ($)
Fair Value
No. of Fund
Berkshire Hathaway Inc. (BRK.B) MediumWide2,942.010.6416
Coca-Cola Company (KO) LowWide49.090.899
Microsoft Corporation (MSFT) LowWide21.460.6113
Johnson & Johnson (JNJ) LowWide55.950.7015
Burlington Northern Santa Fe  MediumNarrow75.570.846
Pfizer Inc. (PFE) MediumWide14.840.578
Procter & Gamble Company (PG) LowWide53.290.6912
Wal-Mart Stores, Inc. (WMT) LowWide50.540.8415
ConocoPhillips (COP) MediumNarrow45.770.6511
Wells Fargo Company (WFC) HighNarrow24.250.8412

Data as of 06-03-09. Fund ownership data as of funds' most recent filings.

Taking a deeper look at the top 10 holdings of the managers that currently make up our Investment Manager Roster, we found more than a handful of names that continue to trade at prices our analysts consider to be good entry points for long-term investors:

 Berkshire Hathaway (BRK.A) (BRK.B)
Berkshire Hathaway (through both its Class A and Class B) shares remains a top holding for 16 of our 26 managers, with the average position size being around 5% of their equity portfolios. Berkshire is a long-time wide-moat favorite of ours, which analyst Bill Bergman believes has, through its melding of insurance with a wide range of nonfinancial enterprises, developed a unique organizational enterprise, one that retains significant potential going forward.

 Microsoft (MSFT)
Morningstar analyst Toan Tran believes that Microsoft's traditional software businesses are firing on all cylinders, but he expects the advent of Web-based software to pose a significant challenge for the firm in the decade ahead. As such, Microsoft continues to work on extending its reach beyond the traditional desktop PC and server markets. The Xbox console system, Windows Mobile for portable devices, Windows Media Center, and the IPTV platform are examples of Microsoft's strategy to be at the core of the digital home.


 Johnson & Johnson (JNJ)
Johnson & Johnson controls the top or number-two spot in 70% of its products, which makes it a formidable competitor in the health-care and consumer markets where it competes. Our analyst Damien Conover believes that the company's ability to maintain a diverse revenue base, a robust research pipeline, and exceptional cash-flow generation creates a wide economic moat around its business. With 15 of our 26 managers holding positions in the stock, Johnson & Johnson is the second most widely held security among our Ultimate Stock-Pickers.

 Pfizer (PFE)
Damien also covers Pfizer, which he believes will be more of a cost-reduction story than a top-line growth company over the next several years. The company's sheer size provides it with the largest economy of scale in the pharmaceutical industry, and that was even before the  Wyeth  acquisition was announced. He believes that the integration of Wyeth will not only strengthen Pfizer's diverse drug offerings, but offer substantial opportunities for further cost savings for the pharmaceutical giant.

 Procter & Gamble (PG)
Our analyst Lauren DeSanto believes that Procter & Gamble's ability to consistently reinvent itself and refocus on improving its capabilities will serve it well in the current environment. Firms with moats as wide as Procter & Gamble's have greater resilience as their structural competitive advantages show through during periods of weakness, and she expects the company to take full advantage of the slowdown in the global economy to not only improve the productivity of its operations but also take share from competitors.

 ConocoPhillips (COP)
Our analyst Allen Good continues to believe that ConocoPhillips is a relative bargain at today's prices. While the company has been impacted by the significant drop in energy prices since the middle part of last year, he notes that the firm has significant ownership in pipeline and other transportation assets that should provide some steady income in this period of commodity price volatility. That said, ConocoPhillips' midstream operations generate around $500 million in net income out of a total $14 billion for the firm, so its near-term fortunes are still heavily tied to its E&P and refining business.

Ultimate Stock-Pickers Top Purchases
One of the main drawbacks of the Ultimate Stock-Pickers' concept has been the timeliness of the data we rely on to put together our lists of top holdings, purchases, and sales. This was readily apparent in our revised list of Ultimate Stock-Pickers' top purchases, with only one 5-star name showing up out of 10 high-conviction purchases during the first quarter. That said, more than half of the names on the list were rated 5 stars during the period, with real-money purchases made by our top managers serving to validate our belief that these companies were undervalued enough to consider buying during the quarter.

The one remaining 5-star on the list-- Becton, Dickinson and Company (BDX)--was not only purchased with conviction, but was even more notable in that three of the four managers who were buying the stock were building new positions in the name. Our analyst Alex Morozov has been impressed with the company's ability to buck the trend of poor operating results by most companies this year, as the essential and recurring nature of many of its medical products has provided it with some resistance to the impact that the recession has had on spending by medical professionals. He notes that Becton's needle and surgical tool empire has provided investors with robust returns on capital for years and that owing to the company's decades-long dedication to innovation and wise deployment of capital its business is prospering and its shareholders continue to be amply rewarded even in this challenging economic environment.

Ultimate Stock-Pickers Top Sales
As for the top sales by our managers, the findings were somewhat less clear-cut (much as they were during our last look at the Ultimate Stock-Pickers' top purchases and sales). In several instances, managers were selling stable cash-flow generators like  3M (MMM),  PepsiCo (PEP), and Abbott Labs to put money to work in beaten-down names in other sectors of the market. The two sales that made the most sense to us were very high uncertainty rated  Wynn Resorts (WYNN) and  Mexican Economic Development (FMX), each of which is facing significant enough obstacles to its operations to give prudent managers reason to step away in the near term.

Despite the muddled output from the Ultimate Stock-Pickers' top sales, we believe that if the markets continue to improve there will likely be a greater level of stability in the net inflows for equity mutual funds, so we should start to see more meaningful data coming through the list. In the meantime, we encourage investors to take a much closer look at the analyst commentary associated with each of the top holdings, purchases, and sales we've highlighted.

Disclosure: Greggory Warren, CFA, has a position in the following securities mentioned above: Johnson & Johnson (JNJ) and Procter & Gamble (PG).

The Morningstar Ultimate Stock-Pickers Team does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.