10 US stocks to own
These names are widely held among some of our favourite US concentrated-fund managers.
Mentioned: Alphabet Inc (GOOGL), Microsoft Corp (MSFT), Booking Holdings Inc (BKNG), PepsiCo Inc (PEP)
In Steal Like an Artist, author (and artist) Austin Kleon argues that nothing is completely original—we learn by copying. Kleon isn't suggesting that plagiarism is OK. Rather, he tells readers that they should collect good ideas and allow themselves to be influenced by them.
We couldn't agree more. When it comes to investing, good ideas can come from a variety of places. The trick is taking these tips, researching them further, and deciding whether these investments are good choices for your portfolio based on your personal parameters.
In fact, we frequently look beyond our own analyst teams for investing ideas. For instance, Firstlink's recently published an e-book of best investing ideas for the next five years from 45 different experts. We also peek into Berkshire Hathaway's portfolio, and regularly call upon local managers for their top stock picks.Â
Today, we're examining the holdings of highly rated, concentrated US-domiciled large-cap funds: FMI Large Cap (FMIHX) and Loomis Sayles Growth (LGRNX), which earn Morningstar Analyst Ratings of Gold, as well as Silver-rated Akre Focus (AKRIX), AMG Yacktman Focused (YAFFX), Jensen Quality Growth (JENSX), Oakmark Select (OAKLX), Parnassus Core Equity (PRBLX), and Sound Shore (SSHVX).
Why focus on concentrated funds? These managers invest in fewer stocks—Akre Focus holds the fewest stocks, at 21, while Yacktman Focused owns the most, at 49—and are therefore choosier about what they buy. And when they buy, they have high conviction. Moreover, we've limited our list to Gold- and Silver-rated funds, meaning that these managers are pretty good at what they do.
Despite the fact that these managers ply a variety of different strategies—the Akre, Jensen, and Loomis Sayles funds land in the large-growth Morningstar Category; Yacktman and Sound Shore can be found in large value; and FMI, Oakmark, and Parnassus are at home in large blend—the portfolios have several holdings in common. In fact, 10 stocks appear in at least three of the portfolios.
Alphabet (GOOGL) and Booking Holdings (BKNG) are the two most commonly held stocks among these managers: Each appears in five portfolios. Clearly, these two stocks in particular and the others included here are fine ideas to "steal." But be sure you steal them at the right price: Seven of the stocks in common are currently fairly valued or overvalued according to our metrics. We think these are stocks to keep on your watchlist, for now.
However, as of this writing, three of the in-common stocks—Alphabet, Microsoft (MSFT) and PepsiCo (PEP)—are undervalued according to our metrics. Here's what our analysts have to say about each business.
Alphabet
"Alphabet dominates the online search market with Google's global share above 80 per cent, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm's cash flow, as we remain confident that Google will maintain its leadership in the search market. We foresee YouTube contributing more to the firm's top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside.
"Google's ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue. The firm utilises technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers. Adoption of mobile devices has been increasing, as has usage time on these devices. The online advertising market has taken notice and is following its target audience onto the mobile platform. We have seen Google partake in this on the back of its Android mobile operating system's growing market share, helping it drive revenue growth and maintain its leadership in the space.
"Among the firm's investment areas, we particularly applaud the efforts to gain a stronger foothold in the fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth, creating more operating leverage, and expanding its operating margin, which we expect will continue. Regarding Alphabet's more futuristic projects, although most are not yet generating revenue, the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet's autonomous car technology business Waymo is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years."
—Ali Mogharabi, senior analyst
Microsoft
"Since taking over as CEO in 2014, Satya Nadella has reinvented Microsoft into a cloud leader. In our view, Microsoft has become one of two public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale. Additionally, Microsoft has accelerated the transition from a traditional perpetual license model to a subscription model. The company has also embraced the open-source movement. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins.
"We believe that Azure is the centerpiece of the new Microsoft. Even though we estimate it is already an approximately $20 billion business, it grew at a staggering 56 per cent rate in fiscal 2019. Azure has several distinct advantages, including that it offers customers a painless way to experiment and move select workloads to the cloud. Since existing customers remain in the same Microsoft environment, applications and data are easily moved from on-premises to the cloud. Microsoft can also leverage its massive installed base of all Microsoft solutions as a touch point for an Azure move. Azure also is an excellent launching point for secular trends in artificial intelligence, business intelligence, and "Internet of Things" as it continues to launch new services centered around these broad themes.
"Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, and Dynamics 365. Like any transition, the initial move is painful, as both revenue and margins drop. However, Microsoft is now on the back end of that, where revenue has accelerated and is more predictable, and margins are increasing. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years."
—Dan Romanoff, analyst
PepsiCo
"For many consumers, the Pepsi trademark elicits images of cola containers and curated ads extolling the brand's taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its exploits now extend beyond this industry, with Frito-Lay and Quaker products accounting for over half of sales and over 65 per cent of profits, by our estimate. A diversified portfolio across snacks and beverages is the crux of many of the company's competitive advantages, in our view. Though management missteps have stymied performance in the past, we believe the confluence of better execution and benefits inherent to its integrated business model has Pepsi poised to reaccelerate profitable growth.
"After years of sluggish sales growth and underinvestment, Pepsi has committed to reinvigorating its top line. To that end, significant investments have been made in manufacturing capacity (for example, production lines to meet demand for reformulated packaging), system capacity (route optimisation and sales technology), and productivity (harmonisation and automation). We view these investments as prudent and believe they will allow the company to strengthen key trademarks such as Mountain Dew and Gatorade, deepen its presence in growth markets like sub-Saharan Africa, while also yielding enough cost savings to reinvest and widen profits. Recent strategic pivots within the energy category (such as the acquisition of Rockstar) should also underpin growth and margins.
"Pepsi's growth trajectory is not without risk, as the company faces secular headwinds such as shifts in consumer behavior. Additionally, shifting go-to-market dynamics, such as online commerce that encourages real-time price comparisons and obviates the extent of Pepsi's retail distribution advantage, allow for more nimble and aggressive competition. Still, we believe that structural dynamics emanating from Pepsi's scale, the cachet of its brands, and the breadth of its portfolio, which support its wide moat, should enable the company to maintain and augment its competitive positioning."
—Nicholas Johnson, analyst