I’m calling these ‘smart money’ buys because the following 5 stocks were recently acquired by super investors or so-called gurus.
Let’s get to it. Richard Pzena of Pzena Investment Management LLC (NYSE:PZN) was sitting on 6,888,221 shares of Omnicom Group, Inc. (NYSE:OMC) at the close of the second quarter. Our goal is to examine this stock and gather some insights into his motives for acquiring this stock.
Omnicom is an advertising agency in the service sector. Now my first thoughts are, “How much are businesses reducing advertising budgets in this economy? Most companies would be slashing operating budgets to meet earnings projections, wouldn’t they? If that’s true, why would anyone invest in an enterprise with diminishing prospects? What does he see in this stock?”
As we trudge through the numbers, it is apparent that OMC is not the darling of the analysts. It isn’t on the radar as a ‘strong buy’, only moderate! The return on equity of 23.64 does suggest that it is well managed and the price to book of 3.16 is somewhat comforting. Projected earnings growth of 1.21 is good, but a look at all the fundamentals reveals nothing that rockets off the page screaming, “Buy this stock!”. OMC offers a decent dividend yield of 2.40%, but so do a host of others.
As I continued to explore beyond the fundamentals, I learned that OMC touts the highest sales per share in the advertising industry. I stumbled on the fact that OMC added some 2500 employees in the closing weeks of 2010, interesting, to say the least. I also determined the stock is trading well below the analysts’ median price.
Two final positive factors; low debt ratio and enviable corporate governance ratings from MSCI, Inc.’s (NYSE:MSCI) RiskMetrics Group. Was it one of these factors, none, or a combination of several that led to this investment?
We’ll move on to American International Group, Inc. (NYSE:AIG), another of Mr. Pzena’s picks, comprising 2.05% (7,718,609 shares) of his portfolio at the end of the second quarter. Looking at the fundamentals, a price to book of 0.43 along with a projected earnings growth of 0.69 are stand-out statistics. Analysts view the stock as a moderate buy just like OMC.
A look at employee headcount shows a decline of some 50% since the bailout, with the current number of employees standing at 63,000. AIG, like OMC, is also trading below the analysts’ median price and AIG also features a low debt ratio. Could pricing and debt ratio be the key criteria for Mr. Pzena?
Joel Greenblatt, another “guru”, has 3 companies in his portfolio that I want to review. First, International Speedway Corp. (NASDAQ:ISCA) in the sporting activities industry with its most telling fundamentals being a low price to book (.87) and a projected earnings growth of 1.04. Clearly Mr. Greenblatt has selected a value stock with an attractive beta of 1.22.
Next, we have Mercury Computer Systems, Inc. (NASDAQ:MRCY) in the technology sector. Like ISCA, it has a low price to book (1.24) and a projected earnings growth of 1.42. Both are viewed by analysts as a moderate buy and both are small companies each with less than 900 employees. I believe this is another value stock and it too has an appealing beta of 1.54.
Last on the list is Staples, Inc. (NASDAQ:SPLS). I think we have yet another value stock here. The price to book is 1.42 and the projected earnings growth is .79. While a significantly larger company than the previous 2, employing upwards of 50,000, it shares the characteristics of Mr. Greenblatt’s 2 previous picks, including a low beta of 1.02.
It is interesting to me that both these gentlemen have similar investment philosophies. Simply put, they both seek to buy the stock of good companies that are selling cheap. When you come right down to it, isn’t that what we all try to do? What sets these men apart is their approach. That is to say, how they find these companies. What criteria they use, what formulas they employ and their personal definition of a good company.
Both men are MBAs. Both are extraordinarily successful in the investment game. Does this mean we have to be MBAs to succeed in the market? I think not. There are plenty of successful investors with no such academic credentials.
As we have seen from this exercise, the stocks acquired by both these gurus represent good companies undervalued by the market, with good earnings potential and solid capitalization. You can find these companies too! We live in the information age. With the internet, the kind of information needed to make intelligent investment choices is available to anyone willing to search it out.
There are a variety of stock ‘screeners’ available that filter out companies meeting criteria that you establish. For example, you can set the price, price to book, price/earnings growth, market cap, sector and other key statistics that define companies in which you may be willing to invest. Once you’ve narrowed the field, you can drill down into such other areas as concern you.
These services are free. You can take advantage of the wealth of knowledge available on the internet and use this knowledge to build a portfolio that is uniquely yours. Gurus have their place to be sure. Much can learned from their successes and, yes, even their failures but, ultimately, responsibility for choosing a stock is yours and yours alone. We should be wary about giving the gurus too much credit or, for that matter, too much blame for the choices we make and the outcome of our investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.