3 Stocks You Will Love From Diamond's Portfolio

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

Diamond Hill's (NASDAQ: DHIL) investment strategy is aligned with the principles of Benjamin Graham and Warren Buffett. It mainly invests in companies when they are trading at a discounted rate as compared to the future cash flow projection of the firm. Diamond diversifies its investments in order to reduce risk and concentrates on long-term investments. As per the recent filings, Diamond Hill mainly focused on the financial (26.2%), health care (15.9%), and consumer goods (14.1%) sectors with ten new positions. I have selected three stocks from Diamond Hill's portfolio, which present a solid investing opportunity.   

Companies

% change in the portfolio in last quarter 13F filing

Hartford Financial Services (NYSE: HIG)

7.04%

Occidental Petroleum Corp (NYSE: OXY)

-4.46%

United Technologies Corp (NYSE: UTX)

-3.87%

  Source – Nasdaq

Though Diamond has reduced its holdings of Occidental Petroleum as well as United Tech, I feel that these are small reductions and that all three stocks are must-buys, if bought from a long-term perspective. Let’s analyze these stocks in detail. 

Hartford Financial Services 

Hartford Financial’s stock performed tremendously and gained around 38.1%, thus outperforming the S&P Property and Casualty (P/C) Insurance Index, S&P 500, and S&P Life Insurance Index by double-digits during the fiscal year 2012. However, in-spite of this notable performance, Hartford reported a net loss of $46 million in its 4Q12. Its total revenue for the quarter stood at $7.74 billion. This sharp decline in the company's earnings was mainly due to restructuring, hedging losses on runoff annuity blocks, and the loss of property as a result of the super storm Sandy. 

In order to regain its earnings growth, Hartford Financial has withdrawn its investments from Hartford's life insurance, individual annuities origination, retirement plans and from broker–dealer units. This deal has freed up capital worth ~$2.2 billion. This sale will help Hartford in achieving its present time critical goals, including returning capital to its shareholders, debt reduction and most importantly strengthening its financial flexibility. According to recent news reports, the company's board has authorized to buy back as much as $500 million in stock and also reduce its debt liability by $1 billion by the end of 2014. Through this capital restructuring, the company will improve its financial flexibility modestly in the coming couple of years.

Through these initiatives, Hartford is also expected to drive profitability in its core business. Based on the company's recent earnings transcript, Management expects fiscal year 2013 earnings to be in the range of $1.375 billion - $1.475 billion, compared to $1.403 billion in 2012. I currently see Hartford’s stock as a good return stock and recommend a buy for long-term growth.

Occidental Petroleum Corp

Occidental Petroleum Corp came up with solid results for its fourth quarter. The company reported $1.5 billion as its core earnings or $1.83 per diluted share for the 4Q12 compared to $1.4 billion in the 3Q12. Growth in core earnings is supported by higher liquid production and higher gas prices during the quarter, along with the 6.5% decrease in the total production cost. The production cost shall continue to decline in the coming quarters due to its cost reduction initiatives.

Occidental Petroleum has been continuously investing billions of dollars in R&D and on cost reduction techniques. During fiscal year 2012, Occidental had spent $10.2 billion on capital expenditure which increased by about 36% in 2012 year-over-year. Continuing its R&D and cost reduction strategies, I expect the company to invest around $9.6 billion in their exploration and production (E&P), midstream and chemical businesses during fiscal year 2013. The company management is optimistic about their cost reduction initiatives and expects costs to drop to below $14/boe (barrel of oil) in 2013 as compared to $14.99/boe in 2012. Absolute savings from the cost reduction will be around $450 million in 2013.

Furthermore, figures suggest that US oil production has reached its peak since the last 20 years. I expect production to further grow by 14% in 2013. With this expectation, Occidental shall invest ~$4.4 billion (out of $9.6 billion) in its E&P business. Continuous cap-ex and expected growth in the US oil production shall boost up its internally generated cash flow to around $13 billion for the fiscal year 2013. I recommend a buy for Occidental’s stock considering its long-term growth potential.

United Technologies Corp 

United Technologies came up with its fourth quarter and full year results for 2012. The company reported $16.4 billion (up 14% y/y) as its sales for the 4Q, whereas revenue for the full year 2012 stood at ~$57.7 billion (increase by ~4% y/y). Both the figures were in line with the consensus estimates. The revenue figures were supported by the Chinese orders for elevators and also growth in North America residential HVAC. 

High growth plans

A unit of United Technologies, Pratt and Whitney is going to invest around $110 million in order to open two manufacturing plants in Singapore by 2013. Both the new plants will start their operations by 2015. As per the Boeing Co. and Airbus, Asia is one of the important emerging markets for aerospace manufacturing and maintenance and there shall be good demand for aircraft worth $4 trillion in the coming 20 years. Via Pratt and Whitney, ultimately United Technologies will take the advantage of this huge demand of aircraft associated with the low infrastructure cost and lower tax rates in Singapore.

Apart from its expansion plan in Singapore, Sikorsky, another business unit of United Technologies along with the Boeing (NYSE: BA) will provide military helicopters to the US military services in the coming years. Both the companies will together replace around 4000 military helicopters that are currently being used by the US Army. I expect this opportunity will help both the companies to grow tremendously in the coming time via this investment.

Overall, I consider United Technologies as a long-term growth stock. The company’s management expects aerospace systems to grow by 5% along with spending in spares to grow by 10% in this financial year. I rate this stock as a buy.

Conclusion 

To sum up, I believe all three stocks discussed above present good long-term buying opportunities. Hartford financial has continuously performed well over the indexes during the last year. Its restructuring plans and expected growth in its core businesses shall fetch market attention towards its stock. Whereas Occidental's cost reduction initiatives along with the ever growing US oil market will give investors higher returns in the coming years. On the other hand, United Technologies' focus on the emerging Asian countries along with its contract with the US defense department will boost up its earnings drastically.


ShwetaDubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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