It’s instructive to review the holdings of the smart PM’s at leading mutual fund houses—T Rowe Price, Fidelity, Gamco and Vanguard. We looked at the top 10 holdings of 18 big-cap growth-oriented funds. Some themes:
- A favorite holding is the card processors, Visa and MasterCard. They look a bit too popular to be great stocks going forward, especially if there are new regulatory / technology hurdles.
- TROW is high on Danaher. But the mainstream industrials and transports names are not much in evidence; United Technologies is the most popular. Only one fund owns GE. Gamco likes International Paper as a dividend play.
- The funds also don’t own many consumer cyclicals such as big retailers (M, WMT, COST, JWN) or apparel companies (NKE, VFC, etc.). An exception is the auto parts retailers, AutoZone and O-Reilly, which TROW likes a lot. This is a play on the Obama economy, where only the fabled 1% can afford a new car.
- The favorite tech names are Google and Apple, followed by Microsoft and Qualcomm. These PM’s are not big fans of supposedly cheap old tech names such as ORCL, HPQ, IBM and CSCO.
- Gilead is the favorite “new pharma” name while JNJ is, by a sizeable margin, the favorite “old pharma” holding.
- Wells Fargo and U.S. Bancorp are the most popular banks, followed by BAC. Fido likes Ameriprise.
- Some “surprises” – at least to me – include Crown Castle (wireless infrastructure), Acuity Brands (lighting), and Fiserv (payment technology).
We know that smart, very well-informed investors like the fundamentals of the 20 stocks highlighted. I own 7 of them. But you have to decide for yourself whether some of them (perhaps V, MA, DHR, GOOG, GILD) are too popular. I am rather surprised these funds don’t own more industrial names, which benefit from creating a cleaner, more energy efficient infrastructure, as discussed in my February 13, 2014 post.
Un-natural Selection Leaves Skeletons in the “Value” Closet
A challenge for “Value investors:” because Mr. Market is smart, “cheap” stocks are often cheap for a reason. In what might be called a process of unnatural selection, some big, dominant companies are mismanaged for so long that their corporate DNA is corrupted to the point where they are very difficult to turn around.
Take GM and Citigroup–please. It turns out that GM knew about its defective ignitions for years without telling regulators; twelve motorists died. On Friday GM did another giant recall. Not great for a tarnished brand in a hyper-competitive industry that is adding lots of new capacity. Meanwhile Citigroup managed to lose $400 million dealing with a shady bank in Mexico, and for the second time it failed its Fed stress test. I am guessing the Fed folks did not give Citi the benefit of the doubt, given its century-long history of egregious mismanagement and government bailouts. Recall that Citi lost Wachovia to Wells Fargo after it thought it had a “done deal.” (See my Dec. 16, 2012 post, “Chronic Crony Capitalist – Time for a Break-Up.”)
Both GM and Citi were giant, sprawling, flat-footed industry “incumbents” that almost failed in 2008 and needed government assistance. They have probably had a hard time recruiting top talent. Their “low valuations” may look tempting, but after years of mismanagement the corporate genes may be more defective than investors appreciate.
More on China—“Reform” and “Downside Risks to Growth” are Perfectly Consistent
On Bloomberg Surveillance perennial China bull Stephen Roach, formerly of Morgan Stanley and now at Yale, sounded peeved when responding to China bears worried about a severe slowdown. They are missing the point, he explained. China is simply “reforming” by shifting from an export and investment led economy to one driven by consumer spending and services (which are more labor intensive and so create more jobs). A crackdown on corruption, less support for State Owned Enterprises and a shift toward market discipline (i.e., more bankruptcies and bond defaults) are other elements of the reform agenda.
I get all that. But Mr. Roche admitted that reform might entail a GDP slowdown. To me, the downside risks are considerable; growth may fall far below the spurious 7-8% GDP numbers Street economists bandy about. Here is an economy moving from being driven by strong export growth, a government financed building boom, a housing boom, and huge credit expansion (to over 200% of GDP), to a more disciplined, market-oriented, consumer-led economy – at a time when housing prices are moderating and export markets are sluggish. It’s hugely optimistic to assume this transition will be smooth and easy.
Copyright Thomas Doerflinger 2014. All Rights Reserved
