David Winters’ Wintergreen Advisors’ Top Stock Picks

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At Insider Monkey, we track quarterly 13F filings from hundreds of hedge funds, including David Winters’ Wintergreen Advisors, as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year).

While the information in these filings is a bit old (the most recent ones are from the end of March), Wintergreen tends to be a longer-term investor, and in any case, its picks can still be treated as free investment ideas (where investors can do further research on interesting names) rather than a list of stocks to blindly imitate. Read on for our quick take on Wintergreen’s five largest holdings from the filing or see the full list of the fund's stock picks.

Two asset managers

Winters owned 1.3 million Class B shares of Berkshire Hathaway, making Warren Buffett’s holding company the largest position in his portfolio. Value investors universally admire Buffett, but don’t always trust the number one slot in their portfolio to his discretionary investment activities. Find Buffett's favorite stocks.

Of course, in some cases, this may be because value funds balk at the premium valuation Berkshire carries relative to book (the P/B ratio is 1.5) or because of uncertainty as to whether or not Buffett’s successors will be similarly skilled in investing.

Wintergreen slightly increased its holdings of Franklin Resources (NYSE: BEN), the $31 billion market cap asset manager, to a total of about 780,000 shares. The company grew its revenue and earnings by a little over 10% each in its most recent quarterly report (for the quarter ending in March 2013) compared to the same period in the previous fiscal year, though it should be noted that U.S. market indices were up during that time frame. The stock trades at 15 times trailing earnings, and so, it could be a value play if it can deliver at least modest growth in the future.

Three more top picks from Wintergreen

Philip Morris International (NYSE: PM) was another of Winters’ top picks, with the filing disclosing ownership of 1.2 million shares. The cigarette company is valued at trailing and forward earnings multiples of 17 and 14, respectively. In theory, the company’s international focus gives it better growth prospects than its peers, but still, in value terms, it seems a bit pricey considering that business has been generally stagnant going by recent reports. Of course, cigarette stocks do tend to be high yielders and Philip Morris is no exception with recent quarterly dividend payments implying an annual yield of 3.8%.

The fund owned a little over 3 million shares of Canadian Natural Resources (NYSE: CNQ) at the beginning of April. The oil and gas company experienced some troubles in the first quarter of 2013 in terms of expenses, and as a result, net income was down considerably versus a year earlier. However, Wall Street analysts expect the business to recover with the result being a forward P/E of 12. That’s in line to slightly higher than what can be found at oil majors, and so, Canadian Natural Resources would have to outperform its industry to be attractive at this price.

Wintergreen increased its stake in Reynolds American (NYSE: RAI) by 39% between January and March, a big move for the fund. In terms of cigarette companies, Reynolds American is generally considered more mature than Philip Morris, and its revenue did decline 3% in its last quarterly report compared to Q1 2012.

The flip side of this is that the company distributes more of its cash to shareholders -- the dividend yield is almost 5% -- and Reynolds American has little correlation to the overall economy as well with a beta of 0.5.

Conclusion

Cigarette stocks are worthwhile targets for income or defensive investors, in our view, though of course there are other picks in the industry than Philip Morris or Reynolds American. Franklin Resources is trading close to value territory, and it would be interesting to examine the company in more depth to see how sustainable its recent financial performance might be.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in PM. The Motley Fool owns shares of Philip Morris 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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