Assessing Muhlenkamp Fund's Top 10 Holdings

by: Devon Shire

I have a two pronged approach to trying to find investment ideas. For small and micro cap companies, I’m willing to do the heavy lifting myself and search for investment ideas. For large and mega cap companies, I prefer to borrow ideas from professional investors I respect.

While I’d like to think I’m the second coming of Michael Burry, the reality is that I’m probably not. So if I can use the best ideas of the best professional managers then I would be silly not to. I’d use their small cap ideas too, but they usually manage too much money to own many of them.

When I look at the qualifications of Ron Muhlenkamp, it isn’t hard for me to figure out that there is a chance he might know more than I do about investing. Consider that Muhlenkamp:

  • Has been active in professional money management since 1968.
  • Is a graduate of both Harvard and MIT.
  • Has convincingly beaten the S&P 500 since the Muhlenkamp Fund launch in 1990.

With those credentials, I think it is fairly clear that it is at least worth an investor's time to look at what Muhlenkamp is thinking.

In his most recent letter to investors, Muhlenkamp provided his watch and worry list of items that currently have him positioning the fund with a higher than normal amount of cash. The watch and worry list is:

  1. European government debt and banking problems.
  2. China’s slowdown which could become a “hard landing” or recession.
  3. The ongoing U.S. political/economical debate on taxes and spending.
  4. We do see improvement in some U.S. states, which are coming to grips with government spending at the state level.

Despite having some major items to worry about, Muhlenkamp is seeing some attractive values in the stock market. And like many well known investors, Muhlenkamp seems to see value in the large multinational space. His exact words are:

The good news is, the number of American (and international) companies with good balance sheets and strong earnings, selling at reasonable prices, several of which we own.

This is similar to the message we have been getting from elite investors such as Jeremy Grantham and Jim Grant, both of whom think that the mega cap blue chips are extraordinarily attractive. Grantham and Grant have mentioned Coca-cola (NYSE:KO), Walmart (NYSE:WMT) and Johnson and Johnson (NYSE:JNJ) as being very attractively priced. Grantham even laid out what the cause of this undervaluation might be.

As for Muhlenkamp, his top 10 holdings at June 30, 2011 are:

  • Unitedhealth Group (NYSE:UNH) – 5.91%
  • Philip Morris (NYSE:PM) – 5.25%
  • Ford (NYSE:F) - 4.68%
  • Laboratory Corp of America (NYSE:LH) – 4.44%
  • Oracle (NASDAQ:ORCL) – 4.19%
  • Intel (NASDAQ:INTC) – 3.63%
  • Abbot Laboratories (NYSE:ABT) – 3.57%
  • Berkshire Hathaway (NYSE:BRK.B) – 3.57%
  • Microsoft (NASDAQ:MSFT) – 3.49%
  • PNC Financial (NYSE:PNC) – 3.44%

The two names in this group that would interest me at this time are Microsoft and Berkshire Hathaway. I’ve written about Microsoft before, but Berkshire Hathaway might be the better choice at this point because not only is Berkshire likely cheap based on the value of its investments plus operating earnings, but those investments are also likely quite cheap in their own right.

With Berkshire, an investor might get both a revaluation of the operating earnings plus capital appreciation in the huge equity portfolio. This could be a powerful combination.

One thing I’m starting to feel pretty strongly about, is that now is a very good time for investors to average into positions in the highest quality companies in the world at very reasonable prices. It likely isn’t going to be all that often that we can buy supreme quality at bargain prices. And that smells like a pretty low risk proposition to me.

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