Top New Money Purchases by Our Ultimate Stock-Pickers
Recent new money purchases offer insight into the thinking of our top managers.
Todd Young | Senior Stock Analyst
As you may recall from some of our previous articles, we believe 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. This is why we focus on both purchases and sales by our Ultimate Stock-Pickers. Just 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 that each security makes up of a total portfolio, we also like to look at new money purchases and outright sales, which we feel offer even more insight into the thinking of our top managers.
While managers will sell a stock for a multitude of different reasons, and can sometimes have several reasons for buying additional shares, they typically put money to work in new names only when they have a high degree of conviction behind the purchase. That's not to say that managers do not make high-conviction additions to their existing holdings, it's just that we believe that it is far easier for them to put money to work in holdings that they are already comfortable with than it is for them to make a bet on a brand new name (let alone one that might have been blown out of the portfolio in a previous period). When looking at these new money purchases, it pays to remember that the higher-conviction buys we are looking at were made during a prior period, so the prices managers paid for these stocks are likely different from where they are today. Still, in our view, new money purchases are probably the best indication of potential opportunities, followed by high-conviction purchases, than simply looking at overall holdings.
Top 10 New Money Purchases by Our Ultimate Stock-PickersStar RatingMoat SizeCurrent Price ($)Price/Fair ValueFair Value Uncertainty# of Funds BuyingGoldman Sachs (GS)3Narrow150.390.84High3Occidental Petrl (OXY)3Narrow78.200.85High2BP (BP)3Narrow38.220.91Very High2MBIA (MBI)3None10.161.69Extreme2Sempra Energy (SRE)3Narrow53.291.02Medium2Patterson-UTI (PTEN)3None16.221.16Very High2American Int'l Grp (AIG)3None36.350.91Extreme1Gilead Sciences (GILD)4Narrow34.390.66High1MasterCard (MA)3Wide198.140.85High1J.P. Morgan Chase (JPM)4Narrow39.760.65High1
Stock Price and Morningstar Rating data as of 09-10-10
Sifting through the seventy-five stocks our Ultimate Stock-Pickers were dedicating new money to during the most recent period, the largest amount of capital was going into securities in the financial services sector, followed by fairly meaningful commitments to energy, industrial materials, consumer goods, and health care stocks. Five of the top ten new money purchases during the period were dedicated to financial services names--namely, Goldman Sachs (GS), MBIA (MBI), American International Group (AIG), MasterCard (MA), and J.P. Morgan Chase (JPM). Of these five stocks, Goldman Sachs, MBIA and AIG really jump out, as they were high-conviction new money purchases made by Bruce Berkowitz's Fairholme (FAIRX) fund. As you'll recall from one of our past articles, Berkowitz has been making a big bet on financials, which now account for close to two-thirds of Fairholme's stock portfolio.
Berkowitz was the sole purchaser of AIG, acquiring as much as one-quarter of the property and casualty insurer's equity this year, and was the largest purchaser of MBIA, which was also a new money purchase during the period for Fairfax Financial (FRFHF). Berkowitz was also the largest single purchaser of Goldman Sachs, which was a meaningful new money purchase for Dodge & Cox Stock (DODGX) and Mutual Shares (TESIX) as well during the period. Fairholme was not, however, buying shares of Mastercard, which was a significant new money purchase for Parnassus Equity Income (PRBLX), with Oak Value (OAKVX) making a meaningful addition to an existing stake in the name. Parnassus was also the largest new money purchaser of J.P. Morgan Chase, with Aston/Montag & Caldwell Growth (MCGIX) making a meaningful addition to its holding in the name.
Gulf Crisis Prompts Energy Stock Purchases
Energy stocks like Occidental Petroleum (OXY), BP PLC (BP), and Patterson-UTI Energy (PTEN) were the second-largest recipients of new money during the period. We attribute much of this to the Deepwater Horizon disaster that morphed into the Gulf oil spill earlier this year, which not only dragged down the stocks of the three firms that were involved--BP PLC, Transocean (RIG), and Halliburton (HAL)--but took down much of the sector as well. It was against this backdrop that our top managers were putting money to work. Looking at Hartford Capital Appreciation (ITHAX), for example, the fund made meaningful new money purchases in four different energy firms: Anadarko Petroleum (APC), BP PLC, Essar Energy PLC, and Suncor Energy (SU). And as we've noted before, Alleghany (Y) continues to build a large position in ExxonMobil, adding another 2 million shares to what had been a 4 million share stake at the start of the second quarter. The energy giant remains Alleghany's largest stock position, accounting for 40% of its equity portfolio at the end of the most recent period. Interestingly enough, though, the insurer continues to fund its purchase of ExxonMobil with sales of other energy firms, like Plains Exploration & Production (PXP), Apache (APA), Global Industries (GLBL), Devon Energy (DVN), Nustar Energy (NS), and Williams Companies (WMB).
The only other energy stock that Alleghany has been buying is Occidental Petroleum, which as you may recall from our last article was the highest-conviction stock purchase made by our Ultimate Stock-Pickers in aggregate during the most recent period, with both FPA Crescent (FPACX) and Parnassus making significant new money purchases, and Aston/Montag & Caldwell making a meaningful addition to their position. With seven funds holding the stock with relatively high conviction at the end of the period, Occidental Petroleum is poised to supplant ConocoPhillips (COP) as a top ten holding of our Ultimate Stock-Pickers--with the latter likely to fall off our list as Berkshire Hathaway (BRK.A) / (BRK.B) moves forward with its ongoing efforts to whittle down its holdings in the name.
With so much interest in the energy sector, which is down more than twice as much as the S&P 500 Index (SPX) since the end of the first quarter, and The Morningstar Ultimate Stock-Pickers Team having already touched on the increased level of investment in the financial services sector by our top managers this year on more than one occasion, we thought it would be interesting to dig a little deeper into some energy names. Cognizant of the fact that there has been a bit of a recovery in energy names since the sector bottomed out in early June, and with none of the six energy stocks purchased with new money during the period--Occidental Petroleum, BP PLC, Patterson-UTI, Suncor, Anadarko and Apache--trading at prices Morningstar would consider buyable today, we asked our energy analysts for their best ideas and came away with the following four names:
While Transocean's Deepwater Horizon offshore drilling rig was at the center of the Gulf oil spill, which has exposed the firm to potentially significant legal liabilities, Morningstar analyst Stephen Ellis believes that there is a strong likelihood that most of the firm's legal liabilities will ultimately be covered by insurance, leaving its strong free cash flow profile intact. As one of the largest deepwater rig operators, Stephen believes that Transocean is ideally positioned to benefit from the coming surge in offshore drilling activity, thanks to attractive well economics and several large discoveries. He believes that long-term demand far outstrips supply for the industry's ultra-deepwater rigs, which only numbered around 35-40 in 2009. Stephen notes that Brazil has indicated a need for another 60 deepwater rigs, and the Tibor and Kaskida discoveries by BP in the Gulf of Mexico could further tighten the market. Once Transocean's construction program is complete, the firm will have nearly 20 ultra-deepwater rigs, all of which are already contracted for years of work. Stephen believes that the market, which is squarely focused on the near-term uncertainty created by the Gulf spill, currently undervalues the company's substantial cash flow-generating power and relatively stable earnings outlook that is provided by its $28 billion backlog.
Spectra Energy (SE)
Morningstar analyst Avi Feinberg notes that Spectra Energy's transportation, storage, distribution, gathering, and processing assets across the United States and Canada cover the spectrum of the natural gas value chain, fulfilling the company's namesake. Even with this diverse product mix, Spectra's cash flows are roughly 80% fee-based, and mostly regulated, which Avi believes will leave the firm with a pretty steady stream of income in almost any economic environment. He also feels that recent concerns about Spectra's gathering-processing commodity exposure are overemphasized in the context of the firm's overall portfolio. In his view, Spectra's massive footprint leverages synergies among pipelines, storage, and gathering-processing assets, allowing the company to collect multiple rents on natural gas headed from major producing basins to key demand centers. As one of the largest midstream companies in North America, Spectra is favorably positioned, with an asset footprint that should continue to foster attractive internal growth opportunities for years to come. Avi notes that recent project announcements in the Marcellus, Horn River, and Montney shale plays make management's five-year goal of 12%-14% returns on capital employed much more likely.
Ultra Petroleum (UPL)
Eric Chenoweth, Associate Director of Morningstar's Energy Team, likes this low-cost producer of oil and natural gas, which has a strong presence in the Green River Basin in Wyoming, and has made strides to tap into the Marcellus Shale play in northern Pennsylvania. He notes that, in addition to quickly ramping up production, Ultra has been working hard to reduce well costs and improve its relative selling prices. The firm's most recent Marcellus Shale acreage additions have helped fill in and block up earlier positions, which Eric believes will enhance Ultra's development economics in that region over the next decade. As more northern Pennsylvania well results become available from Ultra and its peers, it looks like the company is well on its way to adding a second low-cost gas asset to its well-known Pinedale Anticline properties in Wyoming. Eric also notes that, over the last two years, Ultra has taken strides to improve takeaway options for its Wyoming gas fields, and that falling production from competitors in the region should further enhance pipeline availability there. With the firm also continuing to drive down costs on its Pinedale wells, and likely to lower well costs and eventually improve time to sales in Pennsylvania, he feels that Ultra will hold onto its reputation as the one of the lowest-cost producers in the industry.
Morningstar analyst Allen Good believes that ExxonMobil sets itself apart from other supermajors by being a superior capital allocator and operator. Through a relentless pursuit of efficiency, technology, development, and operational improvement, the firm consistently delivers higher returns on capital relative to peers. Allen feels that ExxonMobil's acquisition of XTO Energy lays the groundwork for a significant change in how the company will expand production and add reserves in future years. In purchasing XTO, ExxonMobil has acquired an industry leader in the exploration and production of unconventional natural gas resources. Capitalizing on XTO's experience and asset base, he sees ExxonMobil creating a platform for expansion into unconventional resources throughout the United States and Europe, which should open up additional opportunities for the company to grow production and add reserves. Given its intense focus on returns, though, Allen thinks that ExxonMobil may choose to delay further development of XTO's properties until natural gas prices recover. In the meantime, he sees growth coming from past investments that have been made in large projects that are scheduled to be operational over the next five years, which would likely allow ExxonMobil to achieve its production growth goal of 2%-3% per year.
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Disclosure: Todd Young owns shares in the following securities mentioned above: Berkshire Hathaway.
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.