Donald Yacktman's Top Five Picks

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Donald Yacktman founded Yacktman Asset Management in 1992 and was named the "Portfolio Manager of The Year" by Morningstar in 1991. Per his 2012 investor letter, Yacktman has some big bets placed on consumer staples, not to mention one of the media giants.  

Per his funds' prospectus, Yacktman buys companies that have growth opportunities, but are trading at low prices, employing the best of both worlds with growth and value investing. Specifically, he looks for the following when seeking investment opportunities:
  • Good business:  Indicators such as high market share, high cash returns on assets, low capital requirements and short customer cycles and long product cycles. 
  • Shareholder-focused management:  Includes reinvesting in the business while also having excess cash, making synergistic acquisitions, and buying back stock.
  • Low purchase price:  Includes stocks that sell for less than what an investor would pay to buy the whole company.
Yacktman's top stock 
Yacktman's top pick is the media industry: News Corp (NASDAQ: NWSA). Yacktman notes that News Corp was the biggest contributor to his fund's returns in 2012. Even with the impending spin off of its publishing unit, News Corp still has a relatively diverse revenue stream (read more about the spin off); this includes its cable network business (27% of revenues), filmed entertainment (22%), TV (14%) and publishing (24%).  
However, despite the positives that will come from the spin off, the stock appears to have had a run up of late, which has now pushed the stock into "fairly valued" territory. On a price to earnings basis, the stock trades in line with its peers:
Price to Earnings
  • News Corp 18 times earnings
  • Comcast 18 times earnings
  • Time Warner 18 times earnings
  • Disney 19 times earnings
Yacktman's consumer staple picks

Yacktman's big focus is on consumer staple stocks. He notes that his top consumer staple picks underperformed the market in 2012, as the market rally led to a trade up from high-quality businesses to more risky stocks.  

His top picks in the sector are Procter & Gamble (NYSE: PG)PepsiCo (NYSE: PEP)Sysco (NYSE: SYY)P&G is his second largest holding, Pepsi his third, and Sysco his fifth. These three consumer staple stocks make up 20% of Yacktman's portfolio as of the end of 2012. Part of the reason that Yacktman continues to have a conviction for these picks is that their underperformance is related to "investor sentiment rather than results and should lead to better than average performance from these companies going forward."
Procter & Gamble has a strong presence in developing markets, and is looking to further increase its presence. Developing market sales have grown 12% annually for the past twelve years, and now account for 40% of global sales for the company (see why P&G is a great consumer stable stock).
Another benefit of this stock is its ability to generate strong levels of free cash flow, with $9.3 billion in 2012, representing a 90% cash flow productivity ratio (free cash flow to net income), up from 84% in 2011. The company plans to target a cash flow productivity ratio of greater than 90% going forward. 
The company's dividend is also impressive, yielding 2.9%. P&G has increased its dividend for fifty-six consecutive years. Billionaire Bill Ackman is also a fan of P&G (read more about Ackman's position).
Pepsi competes with major peer Coca-Cola on a number of levels, and as a result announced a restructuring program in February to better position the company to compete financially. The plan includes saving $3 billion by 2015. This will allow the company to better position itself in the U.S. by using those savings to reinvest in advertising and marketing.  Also, Pepsi trades in line with Coca-Cola on a P/E basis, but well below its peer on a price to sales basis: Pepsi is at 1.8 times, Coca-Cola at 3.8 times. 

Sysco is the largest North American distributor of food and food related products to the "food-prepared-away-from-home" industry. The company's customers include restaurants, healthcare and educational facilities. Margins have been narrow lately, with EPS for 4Q 2012 coming in at $0.40, compared to $0.43 for the same quarter last year. This comes as increases in labor, fuel and food costs have risen over the past year. Some of the other headwinds for the company includes the fact that the majority of Sysco sales are to restaurants, which are more sensitive to unemployment and declines in consumer discretionary spending.

Yacktman's tech bet

Cisco (NASDAQ: CSCO) is Yacktman's fourth largest holding as of the end of 2012, and he notes that the "shares continue to be inexpensive as investors generally are avoiding 'old tech' shares." Cisco has a very strong balance sheet, with around $40.2 billion in cash, while debt is negligible.

Despite concerns over a declining PC market, Cisco is the largest player in the networking space. Infonetics has Cisco as the market leader in the enterprise routing segment with 75% of the market share, and a leader in WLAN (50% of the market).

With a robust cash position and leading market share, Cisco recently upped its dividend payment by 75% in an effort to reward shareholders; it's now paying a dividend yield of 2.5%. Cisco is one of the top ten stocks loved by hedge funds (see all 10 here).

Don't be fooled

Yacktman has a lot of faith in News Corp, with over 12% of his portfolio invested in the media company, and while I think the story is compelling, I don't have that much conviction in the stock and believe that Disney could be a better bet (see why). As far as his consumer staple bets, they all appear to be solid bets for a sluggish economy, but as the economy shows signs of rebounding I would be weary of being over exposured to these stocks. However, I would consider P&G as a blend of a consumer staple and turnaround investment. I believe that Cisco has been dragged down due to the declining PC market, but I also believe that Cisco is more insulated than other major tech companies and is being unfairly pressured.  

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, PepsiCo, Procter & Gamble, and Sysco. The Motley Fool owns shares of PepsiCo. 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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