Which Stocks Are Top Value Managers Buying ?

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I think it is important to consider stocks that prominent value investors recently added to their portfolios. As it is explained in one of the blog posts in Warren Trades, top value managers have more resources and information than any individual investor to analyze companies. In general they do not buy stocks for day trading or short term trading. Hedge funds with billions under management are long term oriented so tracking their picks is one important step when analyzing stocks. In this article I will detail recent picks from 4 top value investors.

The first stock is O'Reilly Automotive (NASDAQ: ORLY). Top managers Soros, Greenblatt, Akre, and Hussman invested in this stock. I think that ORLY is one of the best auto parts companies,but it is affected by a weak macro environment that continues to be a headwind with low consumer confidence and sustained high gas prices.  While the company was still able to increase comparable store sales by 1.3%, that was less than the 4.8% increase in comparable store sales from the prior year. ORLY increased operating margins to an all-time quarterly high of 16.4% and reported diluted earnings per share growth of 20%, but revenues grew just 4%.  I do not like when a company shows strong EPS growth but its top line growth is weak. For investors looking for exposure to the US auto sector, I would pick General Motors (NYSE: GM) as the company has a strong balance sheet, shares are undervalued, and it would be releasing new car models that could be a success in 2013.

The second stock is PepsiCo (NYSE: PEP). This is a stock for a long term, conservative investor. Why do I think that? I am encouraged by PEP strong brands, cash flow generation, and emerging market focus. I think that recent investments (that will be the drivers of PEP future growth) will take time to show results. PepsiCo is focused on growth in emerging markets and is acquiring or partnering with established companies in those countries. For example, by acquiring Wimm-Bill-Dann in September 2011, Pepsi took control over the largest food-and-beverage business in Russia, bringing the company closer to its strategic goal of building a $30 billion nutrition business by 2020 according to Zacks. In March 2012, PepsiCo partnered with leading Chinese food and beverage maker, Tingyi Holding Corp. and that has created the number one liquid refreshment beverage (LRB) manufacturing network in China and is expected to help PepsiCo to revamp its Chinese business. In addition, PEP formed a strategic alliance with Ocean Spray whereby the two companies will collaborate to manufacture and distribute a portfolio of cranberry and blueberry-based beverages through PepsiCo’s Latin America drinks division. I think that PEP is a solid company, with leading brands and diversified products but its future growth will come from emerging markets. All those acquisitions and partnerships made by PEP in those economies will take time to develop. Top portfolio managers Ken Fisher, Soros, Keeley, Greenblatt and Tudor Jones recently bought PEP at current price levels.

For investors interested in the gold sector, Newmont Mining (NYSE: NEM) could be an interesting play. Brian Rogers, Soros, Steve Cohen, Ray Dalio, and Eveillard among other prominent managers bought the stock in the recent quarter. Barclays is bullish on US gold miners. A recent Barclays report explained that a confluence of rising gold prices and a renewed focus on generating free cash flow as opposed to undisciplined production growth will drive gold equity valuations back toward historical multiples. Barclay’s analysts concluded that North American gold stocks are ready to restore their former luster through disciplined growth and a focus on returns and free cash flows that should catalyze a return to historical multiples. NEM CEO Richard O' Brien seems to agree on that bullish thesis as he thinks that gold price could get to $2,000 per ounce. This could be very important for NEM investors as the company has linked its dividend policy to gold prices from the last year onwards. If gold touches $2,000 per ounce, Newmont will pay a dividend of $2.7 per share that translates to a yield of 5.4%.  I also like the company's strategy of expanding its gold production through exploration instead of acquisitions.

Visa (NYSE: V) is one of my favorite picks. Several top value managers bought the stock. For example, Lee AInslie, Andreas Halvorsen, and Bruce Kovner added Visa to their portfolios. The company has a strong moat by owning the largest global payment network. This is a low capital intensity business and massively scalable model. As V recently reported acceleration in key volume and transaction metrics through 3Q, that trend should support solid revenue growth in FY13. The company is also returning greater amount of capital versus prior year buyback levels (V announced a new $1.5bn share repurchase authorization and increased its quarterly dividend 50%). Considering Visa's strong FCF generation and the fact that interchange litigation settlement no longer require V to maintain a certain level of capital, I still see upside in this stock. In a recent bullish report, Oppenheimer reported a meaningful acceleration in both US credit volume and cross-border volume, which suggests that Visa is building quarterly momentum. Some investors fear about the entrance of new competitors. For example, PayPal and Discover Financial announced an agreement that potentially will enable 7M merchant locations in the US to accept PayPal by mid-2013. Considering that Discover has only 2% of US card volume share, this deal is unlikely to meaningfully impact Visa volume any time soon. To sum up, I remain long-term believer in Visa, as it is the leader payments network in the world (over 55% of all credit/debit card transactions) with high barriers to entry, and a long organic growth runway as plastic continues to gain volume share from cash or checks, mainly in emerging economies.


martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend eBay, General Motors Company, PepsiCo, and Visa. 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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