Jack Fuller's Tradeable Ideas From the Jeremy Grantham Portfolio

by: Investment Underground

By Investment Underground Editor, Jack Fuller

We took a look towards Jeremy Grantham, who chairs the management firm Grantham Mayo Van Otterloo with a portfolio of more than $85 billion. That portfolio breaks down into 26.2% technology, 4.4% financials, .5% utilities, 1.7% telecommunications, 9.6% consumer services, 19.9% healthcare, 18.8% consumer goods, 4.7% industrials, 1.3% basic materials, 7.6% oil and gas, and 5.3% in other industries. Here is our analysis of eight buy ideas from the stock guru:

Sociedad Quimica Y Minera De Chile SA ADR (NYSE:SQM): SQM holds a large share of the world market in specialty fertilizers and specialty materials lithium and iodine, fueled by its ownership of caliche ore and salar brines in Chile. Both products are extremely rare, with usable caliche ore found only in Chile, and usable salt brines found only in Chile, the U.S., and China. They are also both inexpensive for SQM to extract, resulting in high margins. We recommend a strong buy on SQM based off of its holdings of ore and brine, global demand for fertilizers, and strong demand for lithium for electronics in the coming quarters. SQM boasts a strong balance sheet as well, despite taking increased debt in 2009. SmarTrend today ranked SQM #2 in the Fertilizers & Agricultural Chemicals industry in terms of relative performance, and we rate it an "outperform." SQM currently trades at $57.44 with a market cap of $15.12 billion.

Staples Inc. (NASDAQ:SPLS): The number one office product distributor maintains a dominant market position, a lead we don't see it relinquishing anytime soon. Staples is shifting towards higher margin products and services, increasing its operating margins, while its acquisition of Corporate Express should help improve margins as well. The firm is also focusing on increasing global efficiency to improve its 3.3% global operating margin (North America maintains 8% operating margins). The strategy should help the firm maintain its advantage over its rivals OfficeMax Inc (NYSE:OMX) and Office Depot Inc (NYSE:ODP). However, the Office Supply sector as a whole is fighting to remain relevant. Nomura changed Staple's rating from a "neutral" to "reduce," and outside competition from price-slashers such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), and Amazon (NASDAQ:AMZN) could pressure Staples' bottom line and margins. While we expect Staples to maintain its position at the top of the Office Supply sector, we believe the industry as a whole will facing increasing pressure, and we expect share prices to drop as a result. Sell on this one. Shares trade at $20.25 with a 16 P/E Ratio.

Hudbay Minerals Inc. (NYSE:HBM): This Canadian metal producer produces copper, zinc, gold, and silver, and plans to build a $1 billion copper mine in Peru next year in its efforts to expand into South America. The company is also developing mines in Guatemala, Brazil, Colombia, and Chile, and is currently involved in the Back Forty Project, an evaluation of a large zinc, gold, silver, and copper deposit in upper Michigan. Hudbay reported on May 4th that it would commence with its compulsory acquisition of Norsemont Mining. Hudbay remains at huge risk due to inflation concerns in China and the U.K.; shares recently fell 6.84% to $14.58 based off of concerns that inflation could lead to increased interest rates in China. Until we see China and U.K. inflation numbers settle, we think Hudbay remains a risk to avoid. We recommend that investors sell.

Windstream Corp (NASDAQ:WIN): Windstream formed in July 2006 from the merger between Alltell and Valor Communications and serves nearly 3 million phone lines, 2 million long-distance customers, and 1 million high-speed Internet customers. The firm has been on an acquisition streak as of late; Windstream just acquired D&E Communications and plans to acquire NuVox and Lexcom. The acquisitions Windstream has made since 2009 now account for 30% of revenue, but at the expense of debt, which has risen to 3.7 times EBITDA. Windstream also remains committed to heavy dividend payouts, but will slow down debt payments. We like the acquisitions Windstream has made that diversify holdings, but the weakness of the telecom sector combined with Windstream's debt make this a risk. We recommend a hold until we see Windstream improve its financials. Specifically, we'd like to see debt to equity re-approach historic levels. Shares trade at $13.26.

Gamestop Corporation (NYSE:GME): Gamestop has been feeling the pressure from digital downloads of games, and recently changed strategy towards focusing on digital distribution. Gamestop recently acquired Impulse, a digital distribution platform that holds about 10% of the PC distribution market. Gamestop will also acquire Spawn Labs in 2012, which will allow games and demos to stream on its website. Management expects digital sales of $1.5 billion by 2014 with $825 million - $865 million in operating income, numbers that we believe are a bit optimistic. However, while we like Gamestop's new digital focus, we are concerned with its used-game revenue. A large portion of Gamestop's profit comes from the used video game market, an area that competitors such as Best Buy (NYSE:BBY) and Amazon are beginning to compete in with the launch of their own trade-in programs. Amazon also has a name synonymous with online selling and digital distribution, which may make it a more attractive first stop for digital consumers. We think that profit erosion from diminished used-game sales and increased focus on digital distribution will cause shares to drop. Shares trade at $25.80. We recommend a sell on Gamestop unless it can prove to distribute digital games effectively.

Atlas Energy Inc. (AHD): This natural gas company was acquired by Chevron (NYSE:CVX) in mid February for $4.3 billion in stock, cash and debt, and had plenty of short-term interest because of a potential bidding war between Chevron and Reliance Industries. The acquisition plays into Chevron's vision of natural gas playing an important part in future energy supplies. Chevron expects natural gas to represent 41% of total volumes by 2017, up from the current share of 31%. We expect Grantham to maintain this ATLS holding by holding onto CVX shares that he recieves. While Grantham may eventually redeploy that capital, CVX represents a good integrated oil and gas play at this juncture. It meets the requirements of Grantham's investment philosophy. We are a buyer here.

NYSE Euronext Inc. (NYSE:NYX): The New York Stock Exchange merged with Euronext in 2007, and currently plans to merge with Deutsche Boerse. While the deal would be a win for NYX, the plan has come under regulatory scrutiny as expected, and labor representatives for Deutsche Boerse have urged stockholders to reject the deal. This aggressive move by Deutsche prompted what has turned into a hostile offer from Nasdaq (NASDAQ:NDAQ) and ICE (NYSE:ICE) to takeover NYX. We would rate NYX a buy on its performance alone given strong growth in revenue, earnings-per-share, and net income, but uncertainty surrounding the Deutsche Boerse deal makes this a difficult pill to swallow. We still recommend a "buy" on the stock, but changes with Nasdaq and ICE's offer could change that quickly. Keep a close eye on this one. Deutsche Boerse failed to take over the London Stock Exchange, which tied itself up with Toronto. It failed to take over EuroNext, which went to NYX. This is the chance for Deutsche to even the score. We see huge nationalistic overtones on the horizon and do not expect Wall Street to remain quiet about the prospect of having a European boss. Also, on the surface, the combined ICE and NDAQ bid is technically superior. On a fundamental basis, the pair may have difficulty pulling off the acquisition. The funding is likely available (which would almost certainly not have been the case just 8-10 months ago). We do not have a lot of confidence in NYX's management given the drop in share price since the EuroNext takeover. NYX has some incredibly valuable assets, and we find it to be a shameful job of mismanagement that has brought in a potential bid from Deutsche, which is quite well-run in our opinion, and now NDAQ and ICE, which are equally well-run. Shares of NYX trade around $40, off of the 52-week high of $41.56 it hit recently.

Copa Holdings SA A (NYSE:CPA): Copa operates a transportation network through Panama City with Copa Airlines and Copa Airlines Colombia, maintaining a fleet of 63 aircraft. Copa reported a strong fourth quarter in 2010, with revenue growing 19.7% to $410.6 million and operating income growing 24% to $89 million. It reported even more stellar news in Q1 of 2011 with revenue growing 24.7% and operating income increasing 23.4%. Copa's strength resides in its brilliant management, which has managed to increase passengers, improve plane location-coordination, and control administrative costs to increase revenue and income. Entrance into the STAR alliance in 2012 should boost future traffic as well. We do have a few concerns with the firm: High union membership representation (50% plus) with contract negotiation every four years could eventually lead to interesting work dynamics, and rising jet fuel costs could also cut profitability, particularly with a sustained rise. However, we expect the gains the stock has made to continue and recommend a strong buy based on revenue growth and future growth prospects. CPA currently trades around $64 with a P/E ratio of 12.

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