Analyzing Thomas Russo's Graham-Dodd Style Holdings

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 |  Includes: BF.B, BRK.A, BRK.B, BUD, MA, MLM, MO, PG, PM, UN, WFC
by: Efsinvestment

Thomas A. Russo is a prominent hedge fund manager, who likes to invest in companies with international exposure. Russo, a graduate of Dartmouth College with MBA/JD from Stanford Business and Law School, is a Graham-Dodd style investor. In a lecture offered at Columbia University Russo, he admits his admiration for Buffett’s skills, and that he invests only in stocks with strong fundamentals, where there is a long-term opportunity. In that speech, Russo mentions food, tobacco, media, and beverage companies that have powerful brand recognition, stable profit growth, and pricing power as his favorite stocks. His portfolio holdings show that Russo is following the same investment philosophy he suggested 5 years ago. According to Edgar-Online, 44.5% of his equity investments is in non-cyclical consumer companies. Here is a short analysis of Russo's top 10 equity holdings.

Philip Morris International, Inc. (NYSE:PM): Philip Morris International is one of the largest tobacco producers (especially cigarettes) in markets outside of the United States. I observed a huge demand for strong PM brands especially in East European countries. Market cap of Philip Morris is $120.89 billion. Philip Morris has a P/E ratio of 16.51, and a forward P/E ratio of 13.53. Net profit margin is 11.26%. Philip Morris had annual EPS growth of 0.46%, while analysts estimate an annualized EPS growth of 9.87% in next five years. If the analyst estimates hold, PM can beat the market with a large margin. Although there are speculations on future smoking bans, the governments’ dependency on tax revenues eliminates such possibility. Phillip Morris is a safe stock with lower volatility. Dividend yield of 3.85% puts PM among the top 5 tobacco producers. It is a must hold for the ultimate retirement portfolio.

Berkshire Hathaway Inc. (BRK.A / BRK.B): Berkshire Hathaway is the favorite holding of large institutions who want to benefit from Warren Buffett’s wisdom with minimal effort. One can think of Berkshire Hathaway as one of the largest mutual funds on earth which has an outperforming record. The company mostly invests in financial stocks which are deemed safe by Berkshire. Interestingly, since Stifel Nicolaus upgraded Berkshire’s stocks in February 28, the stock is down by 6%. Buffett's performance usually surpasses analyst estimates. One might want to consider Berkshire a couple of weeks before the portfolio performance is released. Note that this time might be different given the catastrophic losses insurance companies experienced in Q1.

Wells Fargo & Company (NYSE:WFC): Wells Fargo Company runs in three segments: Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement. Wells Fargo-- a Warren Buffett favorite-- mostly avoided the sub-prime securities. Take-over of Wachovia did not show its fruits yet. However, the company has a P/E ratio of 12.10, and forward P/E ratio of 8.29, with a market cap of $154.53 billion. EPS is expected to increase by 9.25% in the next five years. It also serves a dividend yield of 1.64%. While Wells Fargo is not a global company such as Citibank (NYSE:C) or JP Morgan Chase (NYSE:JPM), it has a strong balance with conservative accounting practices.

Unilever NV (NYSE:UN): Unilever N.V. produces and supplies fast moving consumer goods in nutrition, hygiene, and personal care categories in Asia, Africa, Europe, and Latin America. Market cap of Unilever is $99.83 billion. This year’s EPS growth rate is 25.28%, and is expected to increase by 6.40% in the next five years. Net profit margin is 10.39%. Unilever is the global competitor of Procter & Gamble (NYSE:PG), both of which are expected to benefit from global population increase. Similar to other companies listed above, Unilever is also a safe company offering a yield of 3.42%. HSBC securities have really good estimations on Unilever stocks. Since HSBC upgraded Unilever in late January, stock is up by 13%. Given the recent price hike, it is not a good idea to dive in right now. However, in case of a correction, $30 is a good deal.

Altria Group Inc. (NYSE:MO): Altria Group Inc. mainly produces and supplies cigarettes, wine and other tobacco products. The company has a market cap of $55.72 billion. Dividend yield of 5.71% puts Altria among the top dividend stocks for the ultimate retirement portfolio. P/E ratio is 13.79, forward P/E ratio stands even lower, at 12.21. With a net profit margin of 16.63%, EPS growth is expected to increase by 6.10% in the next five years. Ytd return is 9.85%. Insiders increased their holdings by 11.64% in last 6 months. Altria is a dividend champion which increased distributions for 43 years in a row.

Martin Marietta Materials Inc. (NYSE:MLM): Martin Marietta Materials Inc. engages in the production and sale of aggregates for the construction industry in the United States, Canada, the Bahamas, and the Caribbean Islands. Market cap stands at $4.19 billion. EPS growth is expected to be around 10.24% this year. Martin Marietta has a P/E ratio of 43.63, and a forward P/E ratio of 26.30. Net profit margin is 5.52%. Negative recommendations of Davenport and UBS were seen recently. This is one stock that does not fit into Russo’s safe investment philosophy. MLM stocks are highly volatile. At the beginning of January, stocks collapsed $95 to $80 in a remarkably short period. The recovery has taken almost 4 months, and stocks trade for $91.49 as of Friday. While the construction business is expected to start booming this summer, there are cheaper stocks in the market.

MasterCard Incorporated (NYSE:MA): MasterCard Incorporated offers transaction processing and related services to customers. It is one of the oligopolistic players in the industry. With a market cap of $34.05 billion, MasterCard has a P/E ratio of 19.60, and forward P/E ratio of 14.09. Net profit margin is 33.35%. EPS is expected to increase by 17.36% in the next five years. Recently, RBC Capital Mkts, Deutsche Bank, Wedbush and Oppenheimer reiterated buy and outperform ratings for MasterCard. Deutsche Bank has a target price of $300. Since Deutsche Bank put that target, the stock has run upwards from $230 to $275. MA is in high momentum with 10% upside potential.

Brown-Forman Corporation (NYSE:BF.B): Brown-Forman Corporation engages in the manufacture, bottling, import, export, and marketing of alcoholic beverages. With a market cap of $10.60 billion, Brown-Forman Corporation had annual EPS growth of 7.93%, while analysts estimate an annualized EPS growth of 9.87% in next five years. P/E ratio, and forward P/E ratio of the company is 22.40, and 19.84 respectively. Brown-Forman's trailing and forward P/E ratios show that the company is priced for a growth rate higher than that of Apple (NASDAQ:AAPL). The ytd performance of 3.71% underperformed the market return, which is expected to continue throughout the year.

Anheuser-Busch InBev (NYSE:BUD): Anheuser-Busch engages in brewing, and selling beer in North America, Latin America, Europe, and the Asia Pacific. Market cap of BUD is $101.86 billion. With a net profit margin of 15.87%, EPS is expected to increase by 15.30% in the next five years. BUD stock experienced huge volatility in the last 6 months. The stock collapsed from $63 to $53, and bounced back to $64. While Russo believes that BUD is a safe company with a solid business model, I do not agree. There is an increasing trend to return back to micro-brewers. A graphical analysis of BUD stocks also show huge gaps between each trading day. Stock is up by 20% in last 2 months. BUD shares might experience a sharp correction to fill these gaps in the near future.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.