Stock Quotes in this Article: BRK.B, GOOG, JNJ, PG, ABBV

BALTIMORE (Stockpickr) -- What are the big names buying right now? Not much.

Even as the broad market has staged a colossal rally in 2013, the S&P 500 up more than 10% as I write, Wall Street has been in disbelief. And that’s shown through in funds’ performance numbers as well. By and large, hedge funds have drastically underperformed the broad market this year, eschewing equities at exactly the time when the rally kicked into high gear.

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As the early holding filings trickle in for the first quarter of 2013, we’re getting an interesting picture of the few names that fund managers are buying. The focus is pretty clear: The pros are piling money into conventional big-name “blue-chip” stocks right now. But they’re being extremely selective about the names that are getting added onto right now. Healthcare, IT and financial firms make up the bulk of their buys. Today, we’ll take a closer look at five of their favorite stocks.

To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.

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In total, approximately 3,400 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, that’s not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases.

That’s all the more reason to crack open the moves being made with institutions’ $14.6 trillion under management. So far, around 10% of firms have submitted their 13Fs to the SEC – that small sample gives us a sneak peek at which stocks institutions favor right now.

Today, we’ll focus on five institutional favorites for the first quarter of 2013.

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By far, the biggest new position picked up by institutions has been AbbVie (ABBV). That’s not surprising; after all, the $67 billion pharma firm only spun off from Abbott Labs (ABT) early this year. Between new purchases and distributions for firms that already owned ABT, funds added 97.2 million shares of ABBV to their portfolios in the first quarter. That’s a $4 billion position at current price levels.

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AbbVie is a direct play on Abbott’s legacy pharmaceutical business. The firm may as well have been named Humira -- the immunology drug represents around half of the firm’s total sales, making ABBV highly dependent on its patent until it expires in 2016. That’s enough lead time, however, for AbbVie to develop a more mature drug pipeline with more diversification and less reliance on a single blockbuster drug.

In the meantime, AbbVie is going to be raking in the cash with a well-defended high margin pharmaceutical product. Some of that cash will go toward building that pipeline, while another chunk will go to pay investors what amounts to a 3.77% dividend yield. With a reasonable net debt position (ABBV’s cash covers around half of its current debt load) and a few attractive names in its pipeline, investors could do worse than to follow funds into this “old” company with a new name.

Johnson & Johnson

You won’t find a more prototypical blue-chip than health care giant Johnson & Johnson (JNJ). The $227 billion firm has its hands in everything from everything from consumer products like Band-Aid brand bandages to pharmaceuticals and medical devices. Funds added onto their health care buying spree with an additional 7.5 million shares of JNJ in the first quarter.

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Even though Johnson & Johnson’s most consumer-facing business is found on pharmacy shelves, the bulk of the firm’s net income is earned behind the pharmacy counter. JNJ offers a big benefit over pure-play pharma firms, however: the consumer and medical device segments offer investors diversification that few big pharma names can match -- especially as patent drop-offs (AbbVie’s biggest detractor) plague valuations in the industry. A strong pipeline of new drug offerings should smooth out effects from patent expirations in the next few years.

Johnson & Johnson’s balance sheet is in stellar shape right now. While the company only has around $5 billion in net cash after parting with considerable liquidity to acquire Synthes, the firm still has ample cash on hand to pay out its 2.9% dividend yield and to cover any other financial speed bumps in the road.

Procter & Gamble

When I said that investors haven’t been “risk-on” lately, I wasn’t kidding. Procter & Gamble (PG), another massive staid blue chip, was the group’s third-largest buying target in the first quarter. Institutional investors picked up 5.64 million shares of PG, tacking onto their collective $14 billion position in the consumer products giant. If nothing else, the relatively small share add-on is a testament to just how hands-off the pros have been about equities.

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When you think about Procter & Gamble, think “defense.” P&G is a $200 billion consumer product manufacturer, with household name brands such as Tide, Charmin and Cover Girl under its belt. In all, the firm lays claim to 25 individual brands that bring home more than $1 billion in annual revenues, providing impressive diversification on its income statement. Procter has undergone a two-pronged approach to growth in 2013: it’s looking abroad for new opportunities in emerging markets, and it’s trying to cut any extra costs it can from its massive structure. Both efforts should keep the firm churning out net margins deep in the double-digits.

Those big margins, in turn, have helped to provide PG with a strong balance sheet position. While the firm doesn’t boast the net cash position at JNJ, Procter carries a minimal amount of leverage, and it keeps enough cash on hand to pay out its 3% dividend yield. Like Johnson & Johnson, investors could do worse than a big blue chip like P&G in the midst of a broad market rally where quality is getting rewarded, but they could do better too with less obvious names.


I think Google (GOOG) fits the mold of being a less obvious name. Yes, the $261 billion tech stock is one of the biggest names on the Nasdaq, but the IT sector hasn’t seen the same breakneck pace that healthcare and consumer stocks have this year. With shares coming off of a bounce off of support this week, now looks like a pretty opportunistic time to build a position in GOOG.

Early funds should take note -- they only picked up 442,610 shares of GOOG in the first quarter, so they’ve probably got some dry powder left. Even so, Google was one of the most heavily-bought names by institutions last quarter.

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Google owns a gargantuan 60% share of the lucrative but fragmented search business. That search prowess, in turn, fuels around 80% of Google’s revenues through paid search products. All of the cash thrown off by Google’s core search unit helps to fund some of the side projects that the firm undertakes -- and as you might expect, some have been more lucrative than others. While Google does have the money to subsidize economically poor projects long-term, that sort of action is destructive to value, so it’s ill advised.

In an exceptionally low interest rate environment, Google has some big challenges with its huge $43 billion net cash position. It’s hard, after all, to earn a meaningful rate of return on that much cash. So even though Google is better equipped to reinvest money internally, it’s even better off returning a large swath of that cash to shareholders. Cash management concerns aside, the sheer profitability that Google turns out makes it a great core tech holding, even if it’s not super cheap.

Berkshire Hathaway

Even though Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) hasn’t filed its own 13F yet (the firm held a stock portfolio worth $74 billion at last count), it’s certainly been present on other investment managers’ filings. In the first quarter of 2013, funds picked up 5.92 million shares of Berkshire, adding onto a 77.49 million-share position in the conglomerate.

While most investors know Berkshire Hathaway for the group of disparate businesses it owns, including NetJets, Geico, See’s Candy and Lubrizol, it’s probably most accurate to call Berkshire Hathaway an insurance company. Despite the many pitfalls that insurers have faced in the last several years, Berkshire has managed to come out ahead, managing underwriting risks adequately and affording themselves a hefty profitability cushion. When interest rates start to come back around, the firm’s ability to earn should increase materially.

In the meantime, the firm’s huge stock portfolio should continue to get buoyed by this rally, and Berkshire should benefit more than most firms. While Warren Buffett’s succession plan adds some unknown risks to Berkshire over the longer-term, investors shouldn’t discount the long-term performance that the firm has managed to generate -- or his team’s ability to replicate the approach in his absence.

To see these stocks in action, check out the Q1 2013 Institutional Buys portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.