Longview Asset Management Likes These Stocks

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Longview Asset Management, formerly known as Longview Management Group, is a Chicago-based investment fund managed by James Star that invests in publicly traded U.S. equities. The fund’s 13F filings showed only four positions, suggesting that the fund prefers to focus its attention on a small number of stocks. According to the 13F for the second quarter (research changes in Longview's portfolio over time), here are the fund’s four investments at the end of June.

Talk about a confidence pick: 77% of Longview’s 13F portfolio was invested in General Dynamics (NYSE: GD), which provides combat vehicles, weapons systems, and shipbuilding capabilities to the U.S. military alongside its aerospace operations. The fund owned 33 million shares of General Dynamics at the end of June, an amount that was essentially unchanged from a year ago.

General Dynamics is down 3% so far in 2012 against a rising market as investors worry about the impact of lower military spending on the company’s business. If spending cuts do not come to pass—and increasing unrest throughout the world has begun to put some pressure on Washington to maintain the current large budget—the stock should rise accordingly.

General Dynamics, which has a $23 billion market cap, trades at only 10 times trailing earnings and has a 3.1% dividend yield. Its forward P/E is 9 as the sell-side actually expects higher EPS for next year. Warren Buffett’s Berkshire Hathaway also owned shares of General Dynamics at the end of the second quarter, with the holding company’s 3.9 million shares unchanged from the beginning of April. For comparison, larger aerospace and defense company Boeing (NYSE: BA) has a trailing and a forward P/E 12 and a lower dividend yield at 2.5%. Of course, Boeing’s business has a good deal of concentration on aerospace.

The second largest position in Longview’s 13F portfolio, with 6.9 million shares, is as far from a defense contractor as you can get: $7.4 billion market cap pet supply retailer PetSmart (NASDAQ: PETM), which has broadened its service offerings into pet boarding houses and veterinary hospitals. PetSmart is quite defensive at a beta of 0.6—people spend roughly the same amount on their pets regardless of economic conditions—and pays a small dividend yield of 1% as the company focuses on growth. Earnings were up 28% last quarter compared to the same period a year ago, and the company currently trades at 23 times trailing earnings. It’s not a value stock, but could be a candidate for growth-at-a-reasonable-price status.

Longview initiated a position of 2.8 million shares in Polypore International (NYSE: PPO) between April and June. Polypore is a $1.6 billion company that develops and manufactures specialized membranes that are used in batteries and high-tech filtration systems. Polypore has been slipping recently—its earnings last quarter were down 31% from the same quarter last year, and revenue was down as well. As a result, the stock price has dropped 41% since a year ago. Generation Investment Management, managed by David Blood and Al Gore, more than doubled its ownership in Polypore during the second quarter, bringing its stake to a total of 1.3 million shares.

Thermon Group Holdings (NYSE: THR) was the last of Longview’s stock picks according to the 13F. Star and his team maintained a position of 2.8 million shares in the provider of heating and heat tracing cables. Thermon Group has beaten earnings expectations for each of the last four quarters, with analyst consensus for the fiscal year ending in March 2014 implying a fairly reasonable forward P/E of 19 (the company trades at 33 times trailing earnings). If the sell-side is correct—or if they are once again underestimating Thermon Group’s prospects—it could end up being a potential growth stock. 

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of General Dynamics. Motley Fool newsletter services recommend PetSmart and Polypore International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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