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4 More Stocks That Top Managers Have Been Buying

Managers from Diamond Hill and Dodge & Cox picked up some consumer stocks during the market meltdown.

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Stock ideas come from a lot of different places. Frequently in this column, we share best ideas from Morningstar's analysts or new additions to one of Morningstar's indexes. Recently, we've turned to another of our favorite sources of stock ideas--fund managers who we respect. Lately, we've shared what the managers at Oakmark Funds have been buying and the purchases and sales of some other Morningstar Medalist managers, too.

Today, we're looking at the first-quarter buys of two other management teams we're fond of--Diamond Hill and Dodge & Cox.

The team at Diamond Hill Large Cap (DHLCX), which has a Morningstar Analyst Rating of Gold, practices a bottom-up, fundamental approach to stock-picking, focusing on companies trading below its estimates of intrinsic value. Led by Chuck Bath, the team cherishes strong cash flows, attractive business models, and durable competitive advantages.

Listen: Chuck Bath: The Evolution of a Value Investor

Bath and his team amassed a few positions during the first quarter--including Cognizant Technology Solutions (CTSH).

"Cognizant Technology Solutions is an information technology services company that has encountered challenges in its financial-services and healthcare industry verticals, which combined represent over 60% of revenue," the Diamond Hill team explains in its latest commentary. "We are supportive of steps the company is taking to reaccelerate revenue growth after a period of overemphasizing operating margin expansion."

Morningstar recently trimmed its fair value estimate on Cognizant to $70 from $72 after a tough first-quarter earnings report.

"The company still suffered from weakness in its largest verticals--financial services and healthcare--but looking ahead, we consider this concentration to now be a positive feature as we expect the coronavirus pandemic to hit the travel and hospitality, auto, and consumer goods and retail verticals hardest," explains analyst Julie Bhusal Sharma. "Still, with significant costs associated with the Maze ransomware attack announced in April and particular weakness in discretionary offerings likely in the cards, we've lowered our expectations for Cognizant's 2020."

Shares have a Morningstar Rating of 4 stars as of this writing, suggesting that they're undervalued.

The Diamond Hill team also picked up shares of Kellogg (K), which it calls "the global leader in cereal across both the developed and developing world and a powerhouse in snacking with many recognizable brands such as Pop-Tarts, RxBar, Cheez-It, and Pringles.

Morningstar assigns Kellogg a wide Economic Moat Rating and a negative moat trend. The firm's pricing power is eroding, says director Erin Lash, but it has a cost edge and intangible assets from its relationship with retailers that should allow it to outearn its cost of capital over the next two decades.

"We've long attested that Kellogg has been laying the groundwork to reignite its sales trajectory, including its move away from direct-store distribution in favor of warehouse delivery, divesting noncore fare and stock-keeping units, and increasing investments behind its manufacturing capabilities and brands," says Lash. "However, we think the outsize demand from consumers stocking up on essential fare because of COVID-19 is accelerating the fruits of these efforts." We especially like the company's mindset of leaning into brand spending to ensure that its brands remain top-of-mind with shoppers, says Lash.

Shares are trading at 4-star levels as of this writing, suggesting that they're undervalued.

Watch: A Healthy Kellogg on the Horizon

Bath and company's last first-quarter pickup: Mondelez International (MDLZ).

"We believe Mondelez is one of the premier businesses in the global staples space, with recognized brands and dominant market share positions in everyday snacking categories across both the developed and developing markets," they say.

Morningstar assigns Mondelez and wide moat and a stable moat trend.

"Mondelez's fare has been winning with consumers that are staying at home as global social distancing initiatives have taken hold," says Lash. Organic sales growth was significant in the last quarter. However, Lash expects a "lumpy" near term for sales because the resiliency in developed-markets sales maybe be offset by market dynamic challenges in emerging areas.

Shares are fairly valued by our metrics today, trading at 3-star levels.

"While we believe Mondelez can weather the current headwinds, we don't view shares of this wide-moat operator as overly attractive," concludes Lash.

Meanwhile, the management team at Gold-rated Dodge & Cox Stock (DODGX) also had a busy first quarter. These patient contrarians favor undervalued companies with competitive advantages, solid growth potential, and strong management--and they're known for scooping up shares on bad news.

Watch: Dodge & Cox's Recipe for Success

In its latest commentary, the team shares that it added to several of its existing holdings during the first quarter--including Booking Holdings (BKNG).

"Booking Holdings--one of the largest marketplaces for accommodation bookings in the world--is negatively exposed to travel restrictions because of COVID-19, but we believe it is well positioned to weather this downturn," the Dodge & Cox team argues. "Booking is in a very strong financial position, with close to no net debt, access to additional liquidity, and a very low fixed cost structure. Unlike other companies within the travel industry (cruise ships and hotels, for example), Booking does not own or lease operating assets but rather serves as an online marketplace and thus has a more flexible operating model. Over half of its operating expenses are variable (primarily marketing expenses), which the company can scale back with the drop in volume."

Morningstar assigns Booking Holdings a narrow moat and positive moat trend--and we think it holds a leading financial health position in the travel sector industry, says senior analyst Dan Wasiolek.

"We think Booking's sizable network advantage that underpins its narrow moat will not be altered as travel demand recovers once COVID-19 is contained, and in fact it could strengthen, as smaller competitors face increasing challenges in funding the substantial human and operational capital needed to replicate the online travel agency's giant platform," he explains. "We think Booking can spend heavily on marketing ($5 billion spent in 2019, or 33% of total sales), acquiring hotel partnerships, customer support, and its platform, to efficiently drive improved user experience, traffic, and conversion on its website."

Shares trade at 4-star levels as of this writing, suggesting that they're undervalued.

Watch: Online Travel Companies Navigate a Detour in Search Traffic

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.