Purloined Portfolio features JP Morgan, NetEase
Posted: October 17, 2017
I call it the Purloined Portfolio.
Once a year, based on government filings, I highlight a few stocks owned by other money managers I like or admire.
This thievery has paid off pretty well over the years.
Prior to today, I’ve compiled 13 Purloined Portfolios. The average 12-month return (including dividends) has been 15.5 percent, compared to 9.4 percent on the Standard & Poor’s 500 Index for the same periods.
Eleven of my 13 Purloined Portfolios have shown a profit, and eight have beaten the index.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year’s list (six stocks) rose 41.1 percent, well ahead of the S&P’s 21.8 percent from Oct. 18, 2016, through Oct, 13, 2017. The best performer was Lam Research Inc. (LRCX), up 93.5 percent. The worst was Pfizer Inc., up 15.6 percent.
Now for some new respectful thievery. Note that I based my selections on filings with the Securities and Exchange Commission, so it’s possible that a manager might have recently sold the holding I select.
Berkshire Hathway
From the holdings of Scott Black, the head of Delphi Management in Boston, I choose Berkshire Hathaway (BRK/B), the conglomerate run by the redoubtable Warren Buffett. Berkshire sells for 27 times earnings, so people who know what a cheapskate I am may be surprised that I like it.
But since Berkshire owns equity stakes in many other companies, the price/earnings ratio is deceiving. More revealing is the price/book ratio (stock price divided by corporate net worth per share), which is a svelte 1.5.
JP Morgan
From David Dreman, CEO of Dreman Value Management in West Palm Beach, Florida, I will choose the same stock I did last year, JP Morgan Chase & Co. (JPM).
I believe that interest rates will rise in the coming year, propelled by Federal Reserve policy and market forces. Rising rates are good for banks. It is better to borrow at 4 percent and lend at 6 percent than to borrow at 2 percent and lend at 3 percent. The percentage spread is the same, but the spread in dollars is wider.
Exxon Mobile
Randall Eley runs pension money and a mutual fund at Edgar Lomax Co. in Springfield, Va. From his holdings, I’ll pluck Exxon Mobil Corp. (XOM), the largest U.S. oil company.
Exxon shares held up well through the long, dark night of the energy industry’s agony. At the same time, the company has held debt to about 26 percent of equity, so its balance sheet is still strong. It can buy up troubled competitors and fund some new ventures.
Netease
Ken Heebner is a Boston money manager sometimes known as “Bigfoot” because he does some outsized trades. One of his holdings is NetEase Inc., an Internet gaming company in China. The company’s revenue has grown 33 percent a year for the past decade, and sales actually accelerated last year.
The company has a big cash hoard, enough to pay off its total debt if it chooses.
Gilead Sciences
David Katz is chief investment officer for Matrix Asset Advisors in New York. I like his selection of Gilead Sciences Inc. (GILD), a biotech company in Foster City, California.
Gilead achieved almost 30 percent-a-year revenue growth over the past decade. That came to a screeching halt last year, partly because insurers and government agencies are balking at high drug prices. I think Gilead’s research capabilities are strong, and at 9 times earnings I think the stock may be rewarding.
E-L Financial
E-L Financial Corp. (ELF on the Toronto stock exchange) is a mid-sized Canadian financial institution. Life insurance and wealth management are two of its major activities. Earnings are erratic but often strong.
The stock seems attractively cheap to be at six times earnings and 0.7 times book value. I took this idea from the portfolio of Charles Royce, known for his small-cap and mid-cap ideas.
Fabrinet
My final pick is Fabrinet (FN), a contract manufacturer that has its headquarters in Thailand but whose stock trades primarily in the United States. I drew this one from the holdings of Brian Bythrow and John Malooly at Wasatch Micro Cap Value Fund.
Fabrinet has a respectable return on stockholders’ equity, about 16 percent recently. Yet it trades for only 14 times recent earnings and 11 times estimated earnings for the fiscal year that ends in June 2018.
Disclosure: I own shares in JP Morgan and Lam Research personally and for many of my clients. I own Berkshire Hathaway, Exxon Mobil and Pfizer for some clients.