Wellington Is Decreasing Its Stake In These 7 Stocks

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 |  Includes: ACN, AVGO, BP, GE, IBM, NWSA, PEP
by: The Analyst Hub

Wellington Management Company is an investment advisory and hedge fund firm managing over $300 billion in equity assets. The firm manages the Hartford series of funds in addition to other funds. WMC caters to individuals, institutions and pension and profit-sharing plans, charitable organizations, banking and corporations.

I discussed the Top 7 Buys of Wellington in a previous article. In addition to buys, it is also interesting to have a look at top companies where Wellington is booking profit and selling its holdings. The following is a list of its top 7 sells in the last quarter.

Stock

Symbol

Shares Held - 06/30/2011

Shares Held - 09/30/2011

Change in shares

News Corp.

NWSA

80201208

21218916

-58982292

International Business Machines

IBM

18814375

14597555

-4216820

Broadcom Corp.

BRCM

17300120

5267178

-12032942

Pepsico Inc.

PEP

31555182

25244016

-6311166

BP Plc

BP

38583816

28968833

-9614983

Accenture Plc

ACN

23139047

16603450

-6535597

General Electric Co.

GE

132587262

113935568

-18651694

Click to enlarge

Source: 13F filing

I believe News Corp. and Pepsi are likely to underperform the markets going forward. However I don’t agree with Wellington on IBM and Accenture and believe they are a buy instead of sell.

News Corporation is a diversified global media company. The Company operates in six segments: Cable Network Programming; Filmed Entertainment; Television; Direct Broadcast Satellite Television; Publishing, and Other. I believe we are entering another slowdown and News Corp being a media company will be among the first companies to take a hit as advertising spending is cut.

In the long run, I see a big risk to “Old Media” television companies as time spent on prime-time television is decreasing and internet usage (web 2.0 in particular) is increasing. Gadgets like iPads are also a big risk. News Corp dabbled in Web 2.0 business with MySpace but failed miserably. This clearly shows that News Corp (or for that matter any “Old Media” companies) do not have any inherent advantage in “New Media” business and are likely to see tough competition going forward. Further reputation loss caused by the phone hacking scandal will continue to haunt News Corp in the long term and would adversely affect its influence.

PepsiCo, Inc. is another good short candidate. Pepsi has invested almost $7 billion in acquisitions in last 24 months in its attempts to diversify beyond its core soft drinks business. This is more money than it had spent in total in the prior decade. This spend has come at a cost of ad expense which has badly under paced its #1 global competitor Coca-Cola (KO).

Pepsi’s ad spend has been ~3% of sales vs 8% for Coca-Cola. This has lead to market share losses in Pepsi’s core business and has hurt brand development and innovation. The acquisition deals haven’t yielded great results either as is evident from Pepsi’s EBIT margin decline (-240 bps) since 2008. On the other hand, Pepsi’s debt/EBITDA ratio has increased to 1.85x now from 0.65x three years ago.

Going forward, the weak fundamentals trends are expected to continue in the near term, given weak US consumer spending, commodity cost pressures, market share losses and unfavorable y/y forex trends. Consensus estimates remain too high for Q4 and 2012 and analysts are assuming an underlying profit growth in Q4 2012, which is unrealistic.

The company is trading at comparable valuations with other consumer stocks like the Hershey Co. (HSY), Kraft Foods (KFT), Coca-Cola, Procter & Gamble (PG) and Colgate-Palmolive (CL) which are growing volume as fast and have better cash usage. I see a further downside in Pepsi as investors shift to better avenues.

The only upside risk I see to my short thesis is company’s business review, which it will discuss with analysts and stockholders early next year. The company has recently extended this review, which was earlier scheduled to be completed by December. In my opinion, this delay only signifies that fundamentals are becoming incrementally worse, and it is not easy to change the direction of the trend.

I won’t be worrying if the company comes up with any superficial discussion or optical value creators, like spin-offs, etc., after the review. However, any major cost cutting initiative will be a slight positive for the stock. I won’t change my negative thesis in the near term unless there are some major management changes in the company and to be honest, I don’t see much likelihood of that happening.

Two stocks in the above list which I believe are likely to outperform going forward are Accenture and IBM. I believe Accenture will continue to see above-average growth potential in a challenging economy warranting a premium to market valuations. Accenture is currently trading at a 30%+ premium to the S&P 500 (SPY) forward multiple on a calendar-year basis in line with its median historical multiple of ~15x. I would recommend buying it on declines.

IBM is another good long candidate. Warren Buffet recently disclosed his stake in the company. IBM’s stock has been a consistent performer in the past few years outperforming S&P 500 in 5 out of the past 6 years. I like the defensive nature of the business given its high visibility annuity business accounts for more than 50% of revenue and 70% of profits which will support the company during downturn. Trading at ~13x forward earnings, the stock does not look pricey.

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