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Our Ultimate Stock-Pickers' Top 10 New Money Purchases

We've found solid 5-star stocks in the new money purchases of our top managers.

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By Greggory Warren, CFA | Senior Stock Analyst

Given that we had so little luck finding truly investable ideas in the top holdings, purchases and sales of our Ultimate Stock-Pickers, we decided to take a much deeper look at the new money purchases made by our managers during the most recent period. As you may recall, we believe that portfolio managers send signals about how they feel about a particular stock by the amount of money they're willing to commit to it at any given time, which is why we focus on both purchases and sales by our Ultimate Stock-Pickers. As much as we assess the relative attractiveness of an individual security by how many funds hold it, whether or not their managers have been adding to or subtracting from their positions, and the percentage each security makes up of a portfolio, we also like to look at new money purchases and outright sales, which we feel offer additional insight into the thinking of managers about their holdings.

Looking at all of the new money purchases made by our Ultimate Stock-Pickers during the third quarter, the largest amount of capital was being dedicated to securities in the financial services sector, followed by commitments in industrial materials, health care, telecommunications and consumer goods. Within financial services, the two largest purchases were made in shares of  Berkshire Hathaway (BRK.A)(BRK.B), which Bruce Berkowitz has been buying for his  Fairholme (FAIRX) fund, and  Royal Bank of Canada (RY), which  Parnassus Equity Income (PRBLX) made a significant purchase in during the third quarter. Meanwhile in the industrial materials sector,  Republic Services (RSG),  Precision Castparts (PCP),  3M (MMM), and  Allegheny Technologies (ATI) saw the greatest amount of new money committed to them. As you may recall, both  Oak Value (OAKVX) fund and Berkshire Hathaway took meaningful stakes in Republic Services, while  Oakmark Equity & Income (OAKBX) and  Sequoia (SEQUX) were both making conviction purchases in Precision Castparts.

There was also a fair amount of buying going on in the health care sector, with 10 different securities seeing new money put to work in them during the quarter.  Stryker (SYK) stood out the most, though, as it was purchased with conviction by more than one manager. It was not, however, the only medical products firm on the list, as  Gen-Probe (GPRO), C.R. Bard (BCR),  Becton Dickinson (BDX),  Patterson Companies (PDCO), and  DENTSPLY International (XRAY) all saw new money put to work in them during the quarter. In the telecommunications sector, our managers were putting new money to work in Abovenet (ABVT),  Nokia (NOK), and  Vodafone (VOD), with  Dodge & Cox Stock (DODGX) fund taking stakes in both Nokia and Vodafone. Within the consumer goods sector, the list of new money purchases included five packaged food and beverage firms-- Kellogg (K),  Kraft Foods (KFT),  Nestle (NSRGY), Pernod Ricard, and  Unilever (UN)(UL)--as well as a high conviction purchase of  Nike (NKE).

Top 10 New Money Purchases by Our Ultimate Stock-Pickers

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair ValueMorningstar SectorMicrosoft (MSFT)3MediumWide29.870.93SoftwareBrkHthway (BRK.B)4MediumWide3,275.990.74FinSvcsRepublic Svcs (RSG)3MediumNarrow29.291.01IndustMatPrcsn Castparts (PCP)3HighNarrow109.71.19IndustMatAdobe (ADBE)2MediumWide35.81.28SoftwareHewlett-Packard (HPQ)3MediumNarrow50.140.91HardwareeBay (EBAY)3MediumWide22.530.94ConsSvcsNetApp (NTAP)2MediumNarrow33.051.32HardwareGen-Probe (GPRO)3MediumNarrow42.590.85Health Care3M (MMM)3LowWide80.680.95IndustMat

Stock Price and Morningstar Rating data as of 12-10-09

Having a lot of money in aggregate thrown at securities, though, is not always the best indicator of conviction, which is why our list of top 10 new money purchases by our Ultimate Stock-Pickers varies slightly from where the largest amounts of capital were being committed during the quarter. You may recall that when we assess the relative attractiveness of each individual security, we look at not only how many funds actually hold it and whether or not they've been adding to (or subtracting from) the position, but also at the percentage each security makes up of the equity portfolios of each manager on our list. This allows us to better determine the level of conviction that our top managers have in a particular name, eliminating the impact that the size of their portfolios might have on our data.

In other words, just because hardware and software firms like  Hewlett-Packard (HPQ) and  Microsoft (MSFT) were being purchased by some of the smallest funds on our list doesn't mean that these purchases weren't meaningful. Unfortunately for us, though, they aren't currently investable, as none of the top 10 new money purchases by our Ultimate Stock-Pickers are currently trading at prices that our analysts would consider buyable. All of which led us to take a deeper look at the most attractively valued names out of the 85 securities that had new money put to work in them during the third quarter. Focusing on only 4- and 5-Star stocks, we've collected ten names that are not only attractively values, but which were seeing new money put to work in them during the most recent period.

Ten 4- and 5-Star Stocks from Recent New Money Purchases

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair ValueMorningstar SectorUnitedHealth (UNH)5MediumNarrow30.310.63HlthCareITT EducSvcs (ESI)5MediumNarrow88.520.62BusSvcsGenzyme (GENZ)5MediumWide49.590.6HlthCareStryker (SYK)5LowWide51.410.71HlthCarePaychex (PAYX)5MediumWide31.840.69BusSvcsBrkshr Hthwy (BRK.B)4MediumWide3,275.990.74FinSvcsH & R Block (HRB)4MediumWide19.870.83BusSvcsApache (APA)4HighNarrow94.950.72EnergyFiserv (FISV)4MediumWide46.690.77BusSvcsBctn Dickinson (BDX)4LowNarrow77.660.84HlthCare

Stock Price and Morningstar Rating data as of 12-10-09

Always in the hunt for truly investable ideas, we asked our analysts for their thoughts on the five five-star names on the list and came away with these conclusions:

 UnitedHealth Group (UNH)
The complete set of implications that health-care reform holds for UnitedHealth Group are difficult to anticipate, but Morningstar analyst Matthew Coffina thinks the company will continue to play an important role in financing health care services. Matthew likes how UnitedHealth has been able to leverage its 33 million medical members to negotiate large discounts with health care providers that want to be part of the company's network. Even with the uncertainty surrounding health care reform, seven of our top managers held stakes in the firm at the end of the third quarter.

 ITT Educational Services (ESI)
Oak Value fund has been a big buyer in the for-profit education space over the last few quarters, picking up  Apollo Group (APOL) in the second quarter and ITT Educational Services more recently. The managers of the fund believe that while the "education sector is a bit out of favor among investors at this time, owing to fears of the rising student loan default rates that can be expected to accompany rising unemployment," strong demand for post-secondary education should continue to benefit these companies longer term, which echoes the thoughts of our analyst Todd Young.

 Genzyme (GENZ)
Aside from seeing new money put to work, Genzyme got a big boost from  Matrix Advisors Value (MAVFX), which more than doubled its position in this biotechnology firm. Our analyst Karen Andersen believes Genzyme's in-house innovation and smart acquisitions have enhanced its ability to succeed globally. Despite the impact that ongoing supply constraints of two of its leading rare disease therapies have had on results this year, Karen feels the firm's ongoing manufacturing and strategy improvements should set the stage for a recovery in 2010.

 Stryker (SYK)
Both  Amana Trust Growth (AMAGX) and  Yacktman (YACKX) made meaningful new money purchases in Stryker, which was held by four of our top managers at the end of the third quarter. Our analyst Julie Stralow believes that Stryker excels in several of the orthopedic and medical equipment niches where it competes, and fully expects the firm to continue launching innovative new products to maintain its competitive position. While health care reform efforts could reduce long-term returns in Stryker's U.S. operations, she believes that the firm should still make solid enough returns to continue returning value to shareholders.

 Paychex (PAYX)
Our analyst Vishnu Lekraj remains impressed with Paychex's ability to hold its own during what has been one of the harshest employment environments on record. While the firm may derive its wide economic moat from the high customer switching costs and inherit scalability associated with its business, Paychex's results (unlike most other staffing-related firms) do not depend on the marginal need for employees, but on the aggregate level of employment, which does not vary greatly. As the market tends to lump Paychex into the same category as other employment services companies, though, he sees continued improvements in the employment market acting as a catalyst for the stock.

For more information on the other names on our list of attractively value new money purchases by our top managers, as well as the 1,700 other companies we cover, please see our full list of Stock Analyst Reports on Morningstar.com. If you're interested in receiving e-mail alerts about upcoming articles from The Ultimate Stock-Pickers Team, please sign up here.

Disclosure: Greggory Warren owns shares in the following securities mentioned above: Amana Trust Growth; Becton, Dickinson & Company; Kraft Foods.

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.