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Top 10 Buys and Sells of Our Ultimate Stock Pickers

Cautious optimism gave way to more risk taking during the first four months of 2010.

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By Greggory Warren, CFA | Senior Stock Analyst

Despite the dip in the markets since the end of the first quarter, indices like the S&P 500 Index (SPX) are still up more than 50% since the markets bottomed in early March 2009. It was against this backdrop that our Ultimate Stock-Pickers were reviewing their portfolios during the period, making purchases or sales that would prepare them for the next stage of the market. While cautious optimism continued to be the most prominent opinion put forth by our top managers, there was a growing belief that the improvements seen in corporate profits and balance sheets (especially in the financial services sector) could hold up in the near term. Much as we had noted in a recent article on the top purchases and sales by our best performing managers, most of the capital that was put to work during the most recent period went into financial services, followed by energy, industrial materials, and consumer goods).

This ran contrary to what we saw in the fourth quarter when there was a more or less equal amount of conviction being placed in more defensive sectors of the market, such as consumer goods and health care, as there was in relatively riskier areas, like financial services and energy, with more than a handful of our Ultimate Stock-Pickers believing that we were due for a bull market correction.

It will be interesting to see how much effort was made to shift course during the second quarter, as it became apparent that first-quarter earnings were not as robust as many had been anticipating, and the Greek credit crisis emerged to pull down the European Union and potentially derail the global economic recovery. What we've seen so far (aside from Bruce Berkowitz's headlong plunge into financial services stocks like  AIG (AIG) in his  Fairholme (FAIRX) fund) has been a move to pick up consumer goods and services stocks, like  Estee Lauder (EL) and  TJX Companies (TJX), that may have fallen out of favor since the end of the first quarter.

Ultimate Stock-Pickers' Top Holdings

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair ValueNo. of FundsBrkshireHthwy (BRK.B)4MediumWide70.190.812Wells Fargo (WFC)5MediumNarrow27.780.689Coca-Cola (KO)3LowWide51.270.911Johnson & Johnson (JNJ)5LowWide58.010.7313ExxonMobil (XOM)5LowWide59.530.686Wal-Mart (WMT)4LowWide50.400.8415Microsoft (MSFT)4MediumWide25.790.8114CncoPhllps (COP)4MediumNarrow50.060.8112Procter & Gamble (PG)5LowWide60.800.7912American Express (AXP)4HighWide38.410.719

Data as of 06-04-10. Fund ownership data as of funds' most recent filings.

Even with the changes made to the Investment Manager Roster at the start of the year, there haven't been any significant changes in the top ten stock holdings of our Ultimate Stock-Pickers over the last year. Just two of the top ten highest-conviction holdings of our 26 managers,  ExxonMobil (XOM) and  American Express (AXP), were not on the list at the end of the first quarter of 2009. While ExxonMobil was on the receiving end of a significant purchase by insurer  Alleghany (Y) during the first quarter, both it and American Express moved up the ranks more by virtue of two names, Burlington Northern (BNI) and  Pfizer (PFE), falling off than anything else. As you may recall, all of the outstanding shares of Burlington Northern were acquired by Ultimate Stock-Picker  Berkshire Hathaway (BRK.A)(BRK.B) during the first quarter of this year (with the deal being announced in November of last year). Meanwhile, Pfizer took a tumble down the list after Fairholme dumped what had been a rather substantial holding in the health care firm.

Looking at the trading activity in our Ultimate Stock-Pickers' top ten holdings, our managers were net accumulators of Berkshire Hathaway's common stock, despite the fact that both  Sound Shore (SSHFX) and  Tweedy Browne Value (TWEBX) completely eliminated their stakes in the firm during the period. It should be noted, though, that much of this was tied to holdings that the accumulators had in Burlington Northern, making it somewhat difficult to separate the true purchases from the Berkshire shares received as part of the deal. While Tweedy Browne Value was a seller of Berkshire Hathaway, it put the money to work in another financial services firm,  Wells Fargo (WFC). There was very little trading among the eight other holders of the stock, other than a meaningful sale by insurer Fairfax Financial (FRFHF), which still had 12% of its stock portfolio devoted to the money center bank. As for the other financial services name on the list, American Express, there were no meaningful transactions in the stock during the period.

As we noted already, ExxonMobil was the target of a significant purchase by Alleghany, offset somewhat by the fact that  Hartford Capital Appreciation (ITHAX) completely eliminated its stake in the energy giant. This was not unlike the activity in  ConocoPhillips (COP), in which fund managers Sound Shore and  Yacktman (YACKX), were making meaningful additions, while another manager,  FPA Crescent (FPACX) was pulling the plug on the name. Berkshire Hathaway also continued its steady sale of the energy firm, with its holding in ConocoPhillips half what it was a year ago. As you may recall, Warren Buffet acknowledged that the timing involved in building a stake in this firm was poor, and Berkshire has spent much of the last two years unwinding what had been a more than 80 million share stake in ConocoPhillips.

Looking at the consumer names on the list,  Coca-Cola (KO) was bought with some conviction by  Jensen (JENSX), Sound Shore, and Yacktman, with Jensen also throwing more money at  Procter & Gamble (PG) during the period. Meanwhile,  Wal-Mart (WMT) was the recipient of a meaningful purchase by Sound Shore, and  Johnson & Johnson (JNJ), which while technically a health care firm, has many of the attributes of a Consumer Goods stock, and garnered some additional interest from Yacktman. Rounding out the top ten names,  Microsoft (MSFT) saw meaningful new additions by  Parnassus Equity Income (PRBLX) and Yacktman, while  Oak Value (OAKVX) completely blew out its stake. While the managers at Oak Value recognize that Microsoft is "still a great business that generates significant free cash flow," the fact that shares have "nearly doubled since the lows of last year and (with) the prospect of the company producing lower returns on capital" the decision was made to allocate the capital invested in this stake to "more attractive growth opportunities." Based on the fund's activity in the first quarter, which included outright sales of  Aon (AON) and  XTO Energy (XTO), the capital was being put to work in  Aflac (AFL),  Thomson Reuters (TRI),  Teva Pharmaceutical (TEVA),  CME Group (CME),  Praxair (PX),  Apollo Group (APOL), and  Chesapeake Energy (CHK).

Ultimate Stock-Pickers' Top Purchases

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair ValueNo. of FundsExxonMobil (XOM)5LowWide59.530.686BrkshreHthwy (BRK.B)4MediumWide70.190.812Bank of America (BAC)4HighNarrow15.350.618USG Corp. (USG)3Very HighNarrow16.260.653Comcast (CMCSK)4MediumWide16.850.739Regions Financial (RF)4HighNarrow7.130.711Citigroup (C)4Very HighNone3.790.584Qualcomm (QCOM)4MediumWide35.30.726CIT Group (CIT)NR--35.94-2Praxair (PX)3MediumNarrow74.120.985

Data as of 06-04-10. Fund ownership data as of funds' most recent filings.

More than half of the list of top ten purchases by our managers reflects names we recently highlighted in a piece on high-conviction purchases by our best performing managers. That said, we've already noted the issue with Berkshire Hathaway (whose stock was being used as currency to purchase Burlington Northern during the period). We would also be remiss if we did not mention that Bruce Berkowitz's big bet on financials, including significant new money purchases of three of these stocks-- Bank of America (BAC),  Regions Financial (RF), and CIT Group (CIT)--and meaningful addition to  Citigroup (C), have had a big influence on the list of top ten purchases. As for names on that list that our analysts consider buyable at today's prices, ExxonMobil has been depressed as a result of not only  British Petroleum's (BP) mess in the Gulf of Mexico, but also ongoing concerns about its pending purchase of XTO Energy, as well as the global economic recovery. While they're not quite trading at 5-Star prices, both  Comcast (CMCSK) and  Qualcomm (QCOM) are very close to falling into that territory.

Ultimate Stock-Pickers' Top Sales

 Star RatingFair Value UncertaintySize of MoatCurrent Price ($)Price/Fair ValueNo. of FundsWellPoint (WLP)5MediumNarrow54.140.576Magna Int'l (MGA)3HighNone67.260.761Chevron (CVX)4MediumNarrow71.280.795Forest Labs (FRX)3HighNarrow25.010.961Dell, Inc. (DELL)3MediumNone13.240.885Danaher (DHR)3HighNarrow77.781.182Wells Fargo (WFC)5MediumNarrow27.780.689Cardinal Health (CAH)3MediumNarrow34.240.984Ametek (AME)3MediumNarrow40.170.931General Electric (GE)5MediumWide15.710.637

Data as of 06-04-10. Fund ownership data as of funds' most recent filings.

As for the sales, the list suffers from some of the same influences that impacted the top buys--namely, Bruce Berkowitz's big bet on financials, which was funded with outright sales of  Forest Laboratories (FRX), Pfizer, and  WellPoint (WLP), and portfolio reshuffling at Fairfax Financial, which involved significant reductions of stakes in  Magna International (MGA), Wells Fargo,  Dell (DELL),  US Bancorp (USB), and  General Electric (GE). The biggest sale of a Health Care name that was not influenced by Fairholme involved  Cardinal Health (CAH), which was blown out completely by  Dodge & Cox Stock (DODGX),  FMI Large Cap (FMIHX), and Yacktman. While finding the rationale behind all three of these managers stepping out of Cardinal Health has been difficult, it was interesting to note that FMI Large Cap took a meaningful stake in another drug distributor,  AmerisourceBergen (ABC), during the first quarter--a sign that Cardinal Health may have some sort of disadvantage relative to its peers, AmerisourceBergen and  McKesson (MCK), as the drug distribution business remains an oligopoly among these three players. As for the other high-conviction sales, both Alleghany and FPA Crescent were big sellers of  Chevron (CVX), while Jensen completely eliminated its stake in  Ametek (AME) after that firm failed to meet the manager's minimum return on equity requirement of 15% in 2009.

Disclosure: Greggory Warren owns shares in the following securities mentioned above: Johnson & Johnson and Procter & Gamble.

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.