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6 Stocks Funds Love for 2012 - views
BALTIMORE (Stockpickr) -- Last year wasn’t exactly a banner year for institutional investors. While the S&P 500 essentially closed dead flat on the year, mutual funds lost 6% on average in 2011 according to Lipper Research. And hedge funds booked their second worst year in history last year, sliding an average of 5%; high-profile funds fared much, much worse.
So with a new trading year well under way, you’d think that investors have become soured of institutional opinions by now. But that may be a big mistake.
That’s because institutional investors don’t measure investment theses by the calendar year. And now that we’ve ticked into 2012, many of the ugliest bets of last year are starting to pay off. With fund managers getting vindication in the first two months of this year, let’s take a look at the stocks they love.
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.
In total, approximately 3,100 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. Even though not all of the filings are in yet for the previous quarter, we’ve got enough data to get a good idea of the favored stocks for the most recent filing period. And with timeliness being a crucial element of coattail investing, it’s important to strike while the iron’s hot.
Today, we’ll focus on six institutional favorites for the fourth quarter of 2011.
Big pharma giant Pfizer (PFE) has been getting a lot of institutional love of late, weighing in as the most-bought stock by funds during the fourth quarter. Of course, it’s not just institutional eyes that are on this firm -- Pfizer has been getting plenty of attention from both Wall Street and Main Street investors thanks to conspicuous market outperformance and a high profile drug portfolio that’s potentially set to fall off a cliff.
Like most of its peers, patent dropoff is a major problem for Pfizer. The loss of Lipitor is a big blow to the firm, one that won’t be easy to replace with its current pipeline. The acquisition of Wyeth in 2009 dramatically improved Pfizer’s staying power, however, and a combination of new drug prospect and cost efficiencies make this look like a standout business combination.
At the same time, it’s important to remember that investors aren’t paying for present-day Pfizer anymore. Instead, the patent risks are already priced into shares -- that’s clear from the hefty 4.13% dividend yield that Pfizer currently pays out.
With an impressive balance sheet (Pfizer’s hoard of cash effectively makes the firm debt-neutral) and good prospects in its pipeline, it’s no surprise that institutions like this stock for 2012.
Google (GOOG) is another name that was among the most-bought by institutional investors in the final quarter of 2011. Even though side projects -- like the firm’s mobile device business and popular web properties like YouTube -- have been getting all of the attention lately, investors shouldn’t forget the firm’s bread-and-butter: paid search.
Despite all of the other efforts Google’s been taking on, paid search still accounts for around 80% of sales, subsidizing the less profitable businesses that Google has essentially been experimenting with.
One of the more expensive has been the smartphone business. Google’s Android OS has emerged as an extremely popular contender in the highly competitive smartphone space, and the firm’s pending $12.5 billion acquisition of Motorola Mobility (MMI) is a major step towards carving out an even bigger chunk of that market.
That said, Google isn’t exactly raking in the cash in the phone business. While top rival Apple (AAPL) enjoys a wildly profitable smartphone business, Google literally gives out its OS and MMI has historically operated at a loss. Google needs to show investors some more palpable benefits from the smartphone business soon…
Meanwhile, paid search remains the goose that lays the golden egg. Google enjoys an unrivaled share of the search market, a trend that’s unlikely to derail anytime soon. The result is a firm with a massive net cash position on its balance sheet and impressively deep net profit margins.
Even if side ventures frustrate investors, Wall Street can’t argue with Google’s mainline results.
Philip Morris International
Philip Morris International (PM) tips the scales as the world’s second-largest tobacco company. It also weighs in as the third most heavily bought stock by institutional investors in the fourth quarter.
PM’s success is largely predicated on branding. With popular names like Marlboro, L&M, and Parliament under the firm’s umbrella, the company holds almost 16% of the tobacco market outside of the U.S. (former parent company Altria (MO) retains the U.S. market). With the onus on the growing middle class in emerging markets, PM’s upscale, popular positioning is ideal for capturing that growth, particularly as smoking in markets like Western Europe starts to plateau.
While PM is in great shape operationally, one of the firm’s biggest headwinds is a macroeconomic factor: the rise of the dollar. As U.S. equities lost favor in the latter half of 2011, the dollar (and treasuries specifically) became a haven for parking cash. While that trend may be turning a corner as more lucrative stocks start to look attractive again, a strong dollar dilutes PM’s earnings.
Investors should try to avoid taking a big position in PM until the dollar starts to lose traction again.
Industrial conglomerate General Electric (GE) has been under a lot of pressure in the last year. Shares of the firm have fallen more than 11% in the trailing 12 months, dragged lower by exposure to less-than-attractive sectors such as green energy, aviation, and financial services -- three groups that have suffered from diminished demand in this post-recession environment.
But investors’ memories are a bit too short. After all, those are three businesses that fuelled the firm’s profits in the years leading up to the crisis; at this point, with realigned financials and more resilient operating models, they could offer a repeat performance.
From a technical perspective, one major challenge for GE is the firm’s massive correlation with the broad market. The firm has essentially been locked-in-step with the S&P 500 for the last couple of years, a painful process for investors who got stuck along for the ride. Now, though, with the broad market starting to look significantly more bullish, those high correlations could transform into a positive.
In the meantime, a 3.6% dividend yield should keep income investors satisfied until capital gains turn around for GE.
Chevron (CVX) is having an excellent quarter: In the last three months, shares of this integrated supermajor have rallied more than 17%, buoyed in large part by the sustained high oil prices consumers have been battling over that same period. And institutional investors have been taking advantage in a big way; this firm ranks as the fifth most heavily bought stock in 2011’s fourth quarter.
If there’s any word to describe Chevron’s business, it should be “predictable.” Like its peers, the firm boasts net margins around the double-digit mark, a global base of exploration projects, and a strong balance sheet.
Also like its peers, Chevron has been ramping up its investments in natural gas projects in an effort to catch the bottom of the commodity’s prices. The argument that high oil prices will spur substitution for dirt-cheap natural gas is a good one, but the timing hasn’t treated investors well so far.
Even if Chevron is early on the trend, though, the firm should end up a longer-term winner.
Of course, timing could be more pressing for investors. Yesterday, I talked about the technical outlook in this stock in " 5 Stocks to Trade for Breakout Gains" -- and why it could spell upside on a break outside of its $108 - $110 resistance range. That move could provide traders with the ideal high-probability opportunity to buy.
Given the fact that the financial sector effectively torpedoed hedge fund performance in 2011, it may seem surprising that a big bank was funds’ sixth-biggest position increase for the fourth quarter. But it was.
Wells Fargo (WFC) has arguably been the best-in-breed of the “too big to fail” banks since the start of the financial crisis, a status that’s made it a favorite for investors looking for financial sector exposure without the massive risks posed by peers. One reason for that is Wells’ comparatively better underwriting standards and continued focus on retail banking (and deposit growth) over asset sales during the height of the crisis. While it’s very wrong to say that Wells Fargo avoided the crisis, it is accurate to say that the firm’s head hasn’t been on the chopping block.
At the same time, Wells took advantage of deep discounts in peers to expand its geographic footprint immensely, acquiring Wachovia in 2009 to build out the San Francisco-based firm’s East Coast exposure.
An attractive deposit base and increasing fee-driven revenue streams make Wells an attractive financial sector name right now, particularly when compared to higher-beta peers.
To see these stocks in action, check out the Q4 2011 Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.