Jeremy Grantham is a brilliant strategist and genius investor. Over the past 10 years, his mutual fund, GMO U.S. Intrinsic Value Fund, has had a 10-year cumulative return of 31% versus just 16.4% in the S&P. In a recent report to investors, Grantham issued bearish calls on nearly every asset class except timber, emerging markets and U.S. “high quality.” So what has he been buying for his investors? Check the list of 16 of his newest buy ideas from the most recent reporting period, plus some commentary on each. He either initiated or added positions in all the companies below. And as always, please use the list as a starting point for your own due diligence.
Vale S.A. (VALE): Vale has a market cap of $180 billion. It trades under a P/E multiple of 13.4, and with a PEG ratio of 0.9, but comes with a dividend yield of 1.1%. In the first nine months of 2010, the company brought in $31.274 billion in revenues. This is an increase of 79.8% from the first nine months of 2009. EPS is up 195.8%, using the same periods of comparison. The company also generated profits of $11.347 billion, which is an increase of 196.3% from the first nine months of 2009. The ROE is 24.1% and the ROA is 13.88%. The EBIT and margin is 29.2%. The current ratio is 2.09, and the debt to equity ratio is 0.74. Q4 2010 and FY 2010 results will be released on Friday, February 25. Share prices are up 1.5%, over the last 5 days. The 30 day put/call ratio is 0.9.
Pfizer (PFE): This is a smart money idea that David Einhorn also loves. It trades with a P/E multiple of 19.1, P/B multiple of 1.8, and P/S multiple of 2.3. The respective industry averages are 13, 2.7, and 2.5. From 2004 to 2007, the respective P/S multiples were 3.9, 3.4, 3.9, and 3.3.
In 2010, EPS was $1.02, which was a decrease of 17.07%, after growing by 2.5% in 2009. For 2011, the company expects EPS to be between $1.09 and $1.24. Moreover, for 2012, the company is aiming toward an EPS between $1.58 and $1.73.
Philip Morris (PM): The company returned 35.29% on invested capital in 2010. The same figure in 2009 was 31.25%. The company made $67.7 billion in revenues and $7.2 billion in profits in 2010. These are respective increases of 9.1% and 14.4%. In 2010, the EBT margin was 15.25%, but in 2009 and 2008, the margins were 36.92% and 38.66%. EPS was $3.92, which implies a P/E of 16.1. The company expects EPS to rise by 10% to 12.5% in FY 2011.
Ambev (ABV): The company made 25.2 billion reals ($15.2 billion) in net sales in 2010, which was an increase of 8.8%, after growing by 11.98% in 2009. The profit margins in 2010 and 2009 were 66.5% and 66.7%, and the EBT margins were 38.4% and 35.3%. EPS was up by 25.2% to 2.33 reals ($1.407), which implies a P/E of 19.9. Options investors have a positive outlook, as the 30-day put/call ratio is 0.5.
Petroleo Brasileiro (PBR): This massive Brazilian producer has been boosted recently by the major discovery of reserves off the Brazilian coast. This type of extraction is more costly than traditional extraction, so, as prices for oil rise, the justification and margins on this type of extraction grow. Libyan instability leads to spike in oil prices which leads to increased value of PetroBras’s reserves. That said, this type of extraction is also known for its long-term nature. That means investors are aware that the benefits of the reserves will be elongated over a period of time so momentary shakes to the oil market can have less of an effect on the stock.
Chevron (CVX): Recently edging through its 52-week high, Chevron is not just another large, diversified oil and gas company. The company was awarded another gulf drilling permit this past week. With a market cap of $210.48B, the stock pays a $2.88 (2.90%) yearly dividend and is trading at an 11.06 P/E ratio. The company has strong earnings, with a 13.51% operating margin, and also has an impressive 19.29% ROE over the last year. The company currently has more than enough cash to cover its total debt, and has experienced solid growth lately. Like Exxon (XOM), Chevron made a big move into natural gas with its multi-billion dollar acquisition of Atlas Energy. Finally, the company has exposure to many high growth opportunities, both in emerging markets and within alternative energy.
Verizon (VZ): Verizon is a great business that generates a ton of cash, cash that it uses to pay a hefty 5.41% dividend yield and quickly pay off the debt used to fund the Alltel acquisition. This market leader (the company serves around 94 million subscribers or approximately 25% of the U.S. population) already has an extremely loyal consumer base, and with Apple (AAPL) iPhone pre-orders doing gangbusters thus far, we think those relationships will only grow stronger.
Apple (AAPL): The company put up a ROIC of 36.8%, for the trailing 12 months ending in December 25, 2010, and also produced $76.28 billion in revenues. Profit and EBIT margins were 38.76% and 28.5%. ROE was 36.8%. Ending in September, profit margins in 2010, 2009, 2008, 2007, and 2006 were, 39.38%, 40.14%, 34.3%, 33.97%, and 28.98%.
The respective EBIT margins were 28.4%, 28.1%, 21.2%, 20.86%, and 14.59%. The current ratio is 1.85 with a D/E near zero. Apple shares trade under a P/E multiple of 19.1, given that the most recent annualized EPS is $17.93. EPS also grew 75.2% over the past 12 months. The 30 day put/call ratio is 0.7. Given the put/call ratio of below 1, most investors believe that AAPL is undervalued. The computer hardware sub-industry has an average profit margin of 7.57%, ROE of 30.1%, D/E of 0.42, and P/E of 16.5. To learn how much we think Apple is worth per share, see our recent article.
McDonald's (MCD): The international fast-food restaurant giant sports a low beta of only 0.40. The venerable restaurant chain has tranformed itself into an international powerhouse over the last two decades. Once a poster-child for unhealthy, fast-food fare, at least one runner has plans to eat MCD food for the 30 days leading up to a marathon. McDonald’s has a profit margin of 20.55%, and its operating margin is currently 30.34%. The company has a trailing P/E of 16.55 and a forward P/E of 13.78. This is a safe blue chip to consider today. As a low cost-basis food provider, patrons of MCD will return for a long time.
Lorillard (LO): Lorillard is a manufacturer of cigarettes in the U.S. LO’s most popular product by far is its Newport line of menthol flavored cigarettes, which comprise a 35% market share of all menthol cigarettes sold in the U.S., although LO does manufacture other brands including: Kent, True, Maverick and Old Gold. Lorillard has a $12.68B market cap, which makes it one of the smallest tobacco manufacturers in the U.S. LO has the highest operating margin in the industry at 29.14%, an operating cash flow of $1.09B, and pays a $1.12 dividend. LO could be a potential LBO target of tobacco conglomerate Altria (MO), given LO’s consistent cash flows, and the FDA’s decision to not ban menthol cigarettes.
Kraft Foods (KFT): Facing the same challenge as most consumers - increasing input costs - Kraft has used its distribution and acquisition capabilities to maintain its competitiveness. With a market capitalization of $54 billion it is a behemoth. Now with Cadbury cementing its reign over the global confectionary market, the question for investors to answer is perhaps whether or not their portfolio has a sweet tooth? Yields 3.8%.
AT&T (T): T trades at a P/E of 8.8, P/B of 1.5, and P/S of 1.4. The industry averages are 16.1, 2.0, and 1.4, respectively. From 2001 to 2007, T shares traded at a P/S of 2.9, 2.1, 2.1, 2.1, 1.9, 2.2 and 2.2, respectively. In 2010, EPS was $3.35, which was an increase of 58.02%, after decreasing by 1.85% in 2009. The company expects mid-single digit EPS growth or better in 2011. Q1 2011 results are revealed on April 21.
Deere (DE): Deere, maker of tractors and other agricultural and forestry products, has a market cap of $38.57B, and is trading at an 18.40 P/E multiple. The company offers a $1.40 (1.60%) dividend and has shown a ROE of 37.03% over the last year.
As a cyclical stock, continued economic recovery would only boost DE, even after the strong recovery that the stock has already shown. If more good news about the economy keeps piling up, the stock should continue its rise. On March 10, Deere announced a major new investment in Russia, one of the four main emerging market nations. The company could see major growth through this investment, as Russia is a huge country with tons of land available for farming and forestry. Finally, as with other agriculture stocks, DE should benefit from increasing food prices, since higher farming margins will more easily allow farmers to invest in new machinery.
Yum Brands (YUM): The company showed a ROIC of 24.5% in 2010, after returning 27.56% in 2009. Revenues came in at $11.3 billion in 2010, which was an increase of 4.68%, after falling 3.93% in 2009. Profits grew by 8.12% to $1.15 billion in 2010, after increasing by 11.1% in 2009. The respective EBT margins were 14.05% and 12.88%. YUM shares trade under a P/E multiple of 21.4, given an EPS of $2.38 in 2010.
The company expects EPS growth of at least 10% in 2011. Also, it expects operating profit growth of 15% in China, driven by double-digit percentage growth in units, system sales growth of at least 12%, and same-store-sales growth of at least 4%, and moderate G&A leverage. Yum Restaurants International expects operating profit growth of 10% driven by new unit development of 3% to 4%, system sales growth of 6%, same-stores-sales-growth of at least 2% to 3%, and margin improvement and G&A leverage.
The company also raised its quarterly dividend to $0.25 per share, which is a current yield of 1.9%.
Research in Motion (RIMM): Maker of the popular Blackberry cell phone, the company has a market cap of $31.72B and is trading at a P/E of 10.50. The firm’s new tablet PC, the PlayBook, could have a big impact on its competitiveness with rivals Apple and Google (GOOG).
Hansen Natural (HANS): Hansen Natural Corporation is a holding company that, through its subsidiaries, develops, markets, sells and distributes products in the alternative beverage category, which includes natural sodas, fruit juices, juice drinks, energy drinks and energy sports drinks. HANS has a market cap of $4.93B, operating cash flows of $229M, and trades at a 24.28 P/E multiple.