Top Stock Pickers: What They Buy (And Hang Onto)

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For the first seven months of the year it was pretty hard to lose money in the U.S. stock market.

Now, with volatility back in play and all sorts of potential storm clouds looming -- fallout from any Syria intervention, the third round of debt ceiling theatrics -- the playing field is now pocked with more than a few potholes. With that backdrop, checking in with what the really smart money is up to seems especially useful.

Morningstar’s Ultimate Stock Pickers roundup makes it enticingly easy to do just that. Twenty five portfolios with stellar long-term track records, including FPA Crescent and the Yacktman Fund, as well as the investment portfolio of Berkshire Hathaway (BRK-B), are scoured quarterly to divine interesting patterns ripe for further financial research. (Full disclosure: Morningstar is an investor in YCharts.)

Day traders these guys are not. The Top 10 holdings among the 25 portfolios have not changed since the end of last year. Microsoft (MSFT) and Google (GOOG) are owned by 16 of the 25 portfolios. They also rank #1 and #2 in terms of investment conviction: the overall percent of fund assets in the stock relative to that stock’s market cap weighting. Wells Fargo (WFC) and Walmart (WMT) are owned by 14 of the managers, with Wells Fargo ranking #3 in terms of conviction, and Walmart #8.

UPS (UPS) and Johnson & Johnson (JNJ) are in 12 portfolios, with Johnson & Johnson landing as the fourth largest conviction holding and UPS ranking 10th. Procter & Gamble is owned by 11 funds and Pepsico (PEP) by 10. Berkshire Hathaway and AIG (AIG) round out the top 10, showing up in eight and seven portfolios respectively. AIG, is the only stock in the top 10 that Morningstar deems to have no moat. As previously covered at YCharts, wide moat stocks selling at compelling valuations has proven to generate above-average returns.

For the Berkshire Hathaway-philes out there, yes, four of the Top 10 are also part of Berkshire’s investment portfolio: Wells Fargo, Johnson & Johnson, Procter & Gamble and Walmart. When Morningstar relaunched Ultimate Stockpickers in 2009, Burlington Northern Santa Fe was also in the top 10---until it was bought out by Berkshire Hathaway. Interestingly, one of Berkshire’s Big Four, Coca-Cola (KO) was in the Ultimate Top 10 back in 2009, but it no longer makes the cut.

While both Coca-Cola and Pepsico have been equally hard pressed to generate strong revenue growth the past five years, Pepsico has managed to keep its free cash flow per share bubbling.

KO Free Cash Flow Per Share TTM Chart

KO Free Cash Flow Per Share TTM data by YCharts

The Yacktman fund, where free cash flow is much appreciated, has a 6.5% stake in Pepsico, making it the third largest holding in the $12.3 billion portfolio. The Yacktman fund also owns Coca-Cola; at 3.7% of fund assets it is also in the top 10. Worth noting: In the second quarter the Yacktman managers added 10% to their Coca-Cola stake, while sitting tight on the Pepsico position.

It’s no secret that Warren Buffett has the most conviction in Wells Fargo. The stock is now Berkshire Hathaway’s largest position at more than 21% of assets. It’s not too hard to see what Buffett and the other 13 ultimate stock pickers like: Since the crisis, return on assets has risen impressively (keep in mind JP Morgan Chase ‘s (JPM) current return on assets is 1.03%), the stock has recovered and yet the valuation remains low.

WFC Chart

NYSE:WFC data by YCharts

Going forward it will be interesting to see how Wells Fargo, which dominates the residential mortgage market, fares given the slowdown in mortgage refinancings of late. That said, what has slowed refis -- higher interest rates -- should ultimately help Wells Fargo and other banks on the net interest margin front.

If you’re looking for income, Wells Fargo’s 2.9% trailing 12-month dividend yield is close to the 3.1% yield for the highest yielder among the top 10 holdings, Procter & Gamble. Yes, Wells Fargo slashed its dividend during the financial crisis, but it’s been aggressively boosting its payout. Wells Fargo increased its dividend nearly 9% over the past year, compared to 2.3% for Procter & Gamble. With a payout ratio still below 30%, Wells Fargo seems to have a solid balance sheet that can keep the dividend growth on pace.

For the best mix of current income and dividend growth, Microsoft is the gem among these 10 stocks, having raised its dividend more than 75% over the past five years.

MSFT Dividend Chart

MSFT Dividend data by YCharts

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.


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