How Billionaire Tom Russo Is Trading This Market

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 |  Includes: BRK.A, BRK.B, BUD, MA, UN, WFC
by: Investment Underground

By Douglas Ehrman

An often effective way to get an insight into significant market trends is to examine the trading decisions of some of the world’s most prominent investors and money managers. Tom Russo, of Gardner Russo & Gardner, is one such guru who’s trading is worth monitoring as of the end of the second quarter, the firm owns 117 stocks valued at approximately $5.3 billion.

What follows is an analysis of five of the recent trades made by Russo to add size to the listed positions, along with a brief analysis of each company and why it may have been on Russo’s accumulation list.

Wells Fargo (NYSE:WFC) – Mr. Russo added to his WFC holding by 17.7% during the second quarter at an estimated average price of $28.41 per share; this brought the portfolio weight of this stock to 0.64%. With the stock currently offering a dividend yield of nearly 2%, there is a good argument for the income argument at a time when many investments have flat to negative real yields.

When coupled with the perception that the mortgage market is improving, the housing market is stabilizing, and the U.S. government will no longer allow sizable financial institutions to fail, qualifying WFC as a blue chip is reasonable. The income play is compelling, and as the economy stabilizes, financials are well positioned to perform over the long-term.

Berkshire Hathaway Class A (BRK.B, BRK.A) – Mr. Russo added to his BRK.A holding by 4.47% during the second quarter at an estimated average price of $118,427.00 per share; this brought the portfolio weight of this stock to 0.35%. Warren Buffett’s renowned company, with its heavy focus on insurance has been well positioned to benefit from a widespread recovery in the economy. While it is difficult to make meaningful comparisons between Berkshire and others, when compared to American International Group, Inc. (NYSE:AIG), the company looks even more attractive.

The recent unsolicited bid for Transatlantic Holdings, Inc (NYSE:TRH) shows that the company is pressing to remain nimble and a leader in the industry (it is unlikely that the bid for TRH had any impact on Russo’s accumulation, but it is a representative transaction that colors that decision). The unsolicited bid has been described as “out of the norm” for the company, but it is instructive as to the company’s wish to remain in control.

Anheuserbusch Inbev Sa/nv (NYSE:BUD) – Mr. Russo added to his BUD holding by 11.17% during the second quarter at an estimated average price of $59.36 per share; this brought the portfolio weight of this stock to 0.32%. Also showing a dividend yield just below 2%, BUD is a reasonable income play as well. As for the longer-term position on the stock, while BUD has a higher trailing price-to-earnings ratio that its smaller competitor, Molson Coors Brewing Company (NYSE:TAP) (19.38 versus 11.88), when the growth element is included, the price-to-earnings over growth figure (NYSE:PEG) is more attractive for BUD – 0.96 versus 0.98.

When looking at PEGs, a reading of under 1 is generally considered favorable, with the lower readings being even better; the idea of PEG is to determine what is being paid for the earnings of a company with an eye to future growth. Price-to-earnings ratios look at what price is being paid for each dollar of earnings that the company creates; adding the growth element gives a more dynamics measurement.

In addition to the above, Russo has a reputation for preferring larger and more diversified international companies like, BUD over TAP, holding the stated view that the management teams of international firms are more in tune with global trends and better long term investments. In this case, BUD’s ability to seek a globally diversified source of growth and profit is of particular interest in light of the international pressure on commodity prices. This cost competition may make the company more able to adapt as prices fluctuate.

Mastercard Class A (NYSE:MA) – Mr. Russo added to his MA holding by 7.99% during the second quarter at an estimated average price of $274.05 per share; this brought the portfolio weight of this stock to 0.31%. Despite current levels in the stocks of MA and Visa (NYSE:V), which have led to significant shifts in the metrics between the two companies, at the time Russo was accumulating his shares these metrics were more favorable for MA as a relative investment. Year-to-date, MA has outperformed V and shown itself to be the stronger investment choice.

Even with the positive relative price action, MA remains the most attractive in terms of price-to-earnings over growth (PEG); only Discover Financial Services (NYSE:DFS) is stronger in this metric. The fairly recent announcement by federal regulators about new maximum fees, as well as the other restrictions, were a favorable driver of price for all participants in this industry. Given expectations about potential reforms, the credit card processors have done quite well this year thus far.

Unilever (NYSE:UN) – Mr. Russo added to his UN holding by 4.8% during the second quarter at an estimated average price of $32.36 per share; this brought the portfolio weight of this stock to 0.18%. As an international conglomerate, Unilever has done quite well year-to-date, particularly when compared with its competition. The best comparable company to consider is Proctor and Gamble (NYSE:PG). Since the beginning of the year, UN is up over 10% while PG is down over 5% during the same period.

This price action has made the current financial metrics appear more favorable for PG on a relative basis, but, at the time Russo was acquiring the stock, the metrics would have been more favorable. At current levels, UN still looks attractive, but there is definitely an argument to be made that any further increasing of a position in this name should be limited to buying on a future pullback.

UN has done a good job at managing its exposure to the rising prices of commodities and protected its pricing power, one of the reasons it has remained strong. This strength suggests that the stock may continue to trend higher, but these cost inputs should be carefully monitored.

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