By Matt Doiron
Forbes magazine recently released a number of "best ideas" from investors and analysts for 2013. Two of the investors who provided recommendations for their feature were billionaire Ken Fisher- who is not only a Forbes columnist but also the manager of Fisher Asset Management- and value investor Donald Yacktman. Here is our quick take on some of the stocks they discussed:
Fisher was bullish on large drug manufacturer Pfizer (PFE), arguing that its extensive portfolio of brands would help it see growth opportunities as the U.S. population ages and the rest of the world develops. Fisher Asset Management had increased its stake in Pfizer by 45% during the third quarter to 32 million shares, and it was the largest stock position in the fund's portfolio at the end of September (check out more of Ken Fisher's stock picks). At 19 times trailing earnings, we don't think that Pfizer is particularly cheap right now; to justify its current valuation, it will have to deliver on Fisher's growth thesis. Wall Street analysts expect strong growth next year, but with the company reporting a significant decline in earnings in the third quarter versus a year ago we'd be more cautious about investing.
Fisher also submitted a sell recommendation to Forbes: $4 billion market cap grocer Safeway (SWY). In purely quantitative terms, Safeway looks like a classic value stock: it trades at 8 times earnings on either a trailing or a forward basis. It recently reported an increase in earnings compared to the same quarter last year, and sell-side analysts expect continued growth which place its five-year PEG ratio at a bit below 1. In addition, Safeway pays a 4.1% dividend yield at current prices and has increased its dividend payment every year since 2006. Yet Fisher isn't alone in his bearishness, as the most recent data shows that 30% of the outstanding shares are held short. Still, we'd be more interested in considering Safeway as a buy, and it might be worthwhile to look at the company more closely to see if it can at least sustain its current business.
Yacktman liked the predictable, cash generating personal products company The Procter & Gamble Company (PG). Procter & Gamble owns brands including Gillette, Duracell, and Head & Shoulders; as the beta of 0.3 makes clear, consumers generally buy these products regardless of economic conditions. The company is also able to pay a dividend yield above 3% thanks to the stability of its business. However, as with Pfizer, the recent financials and valuation aren't really that great: the trailing P/E is 19, and revenue and earnings both slipped slightly last quarter versus a year earlier. While Warren Buffett's Berkshire Hathaway (BRK.B) owned 53 million shares at the end of the third quarter, this was down 11% from the beginning of July (see what stocks Warren Buffett has been buying instead).
Yacktman also encouraged investors to look at contrarian plays Hewlett-Packard Company (HPQ) and Research in Motion Limited (RIMM). Both of these tech companies are- in the conventional wisdom- being destroyed by an inability to adapt to a market in which consumers shift towards tablets and more Apple-like smartphones than the BlackBerry. HP currently trades at 4 times forward earnings estimates; its share price recently tumbled even further after the company wrote down a bad acquisition, and is now down 53% from a year ago. Research in Motion rallied recently on analyst forecasts of decent BlackBerry 10 sales, but it is still down 27% year to date with consensus still being that it will be unprofitable in its next fiscal year ending February 2014. Revenue at Research in Motion has also been plummeting, and so we'd avoid the stock (a short position might not be a good idea given the ever-persistent takeover rumors). HP was one of Relational Investors' top stock picks at the end of September, with that fund (managed by Ralph Whitworth) owning close to 35 million shares (check out more of the fund's top stock picks). Its most recent quarter showed a fairly modest decline in sales compared to the same period in the previous year. It might be worthy of further study, though we do expect continued weakness in the PC industry and would have to see progress in its transition towards becoming a more services-oriented company.