In this article, via an analysis (based on the latest available Q3 institutional 13-F filings) of the investing activities of the world's largest fund managers managing between $100 billion and over a trillion dollars, we identify the food and drug retailers that are being accumulated and those being distributed by these mega managers. Besides supermarkets and drug store companies, the group also includes restaurants and food wholesalers.
We then crossed that data with the food and drug retailers that are trading at value prices, based on their projected earnings for FY 2012, operating cash flow on a trailing-twelve-month (TTM) basis, and other valuation measures such as price to book (P/B) and price to sales (PSR) ratios, and came up with a list of undervalued companies in the group that are being accumulated by these mega fund managers, and those being distributed by them. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.
We determined based on our analysis that mega fund managers are neutral on the food and drug retailers, and they are slightly under-weight in the group. During the September quarter, these mega fund managers together cut a minor $50 million from their $127.24 billion prior quarter position in the group, selling $6.97 billion and buying $6.92 billion worth of stocks in the group. Furthermore, overall they are slightly under-weight in the group by a factor of 0.9; that is taken together mega funds have invested 2.4% of their capital in the food and drug retail group compared to the 2.6% weighting of the group in the overall market.
The following are the food and drug retail group companies that mega fund managers are bullish about, and that are also trading at a discount to their peers in the group:
CVS Caremark Corp. (NYSE:CVS): CVS is a leading integrated pharmacy services provider in the U.S. It includes the nation’s largest pharmacy chain with over 7,100 pharmacy drugstores in 41 states and D.C. Also, it provides pharmacy benefit management services to employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans, as well as to individuals. At $16.62 billion, this is the second largest position for mega funds in the food and drug retail group, including cutting a minor $188 million in Q3. Also, together mega funds hold 32.4% of the outstanding shares, slightly more than their 30.8% weighting in the group. The top buyer was Goldman Sachs Asset Management ($251 million), and the top holders are State Street Corp. ($1.95 billion), Vanguard Group ($1.94 billion), Wellington Capital Management ($1.60 billion), and Fidelity Investments ($1.48 billion).
Overall, 1,033 institutions hold 89.2% of company shares, with Davis Selected Advisers (2.50 billion), State Street, Vanguard, Franklin Resources Inc. ($1.90 billion), Wellington and Fidelity being the top holders with 5.2%, 4.0%, 4.0%, 3.9%, 3.3% and 3.0% of the outstanding shares respectively. CVS trades at a discount 11-12 forward P/E compared to the 15 average for its peers in the retail drug stores group, while earnings are projected to rise at a 9.9% compound growth rate from $2.66 in 2010 to $3.21 in 2012. Also, it trades at 1.3 P/B and 7.1 P/CF compared to averages of 3.1 and 12.5 respectively for its peers in the retail drug stores group.
Darden Restaurants Inc. (NYSE:DRI): DRI operates approximately 1,800 full service restaurants in the U.S. and Canada under the Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52 brand names. Mega funds added a net $237 million to their $2.36 billion prior quarter position, and taken together mega funds hold 42.2% of the outstanding shares, significantly greater than their 30.8% weighting in the group. The top buyer was Capital Research Global Investors ($220 million), and the top holders are Capital Research ($545 million), Vanguard Group ($331 million) and State Street Corp. ($234 million).
Overall, 523 institutions hold 83.1% of company shares, with Capital Research, Vanguard, and State Street being the largest holders with 9.0%, 5.5% and 3.9% of the outstanding shares respectively. DRI trades at a discount 10-11 forward P/E compared to the 16.1 average for its peers in the restaurants group, while earnings are projected to rise at a 12.2% compound growth rate from $3.41 in 2010 to $4.29 in 2012. Also, it trades at 3.1 P/B and 7.6 P/CF compared to averages of 9.2 and 9.7 respectively for its peers in the restaurant group.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR): GMCR operates in specialty coffee industry in the U.S. and internationally. It distributes approximately 200 whole bean and ground coffee selections, cocoa, teas, and coffees. It is probably most famous for its patented single-cup coffee and tea brewing systems for offices and homes sold under the Keurig brand name. Mega funds added a net $26 million to their $3.32 billion prior quarter position, and taken together mega funds hold 42.2% of the outstanding shares, significantly greater than their 30.8% weighting in the group. The top buyer was Ameriprise Financial ($166 million), and the top holders are Fidelity Investments ($1.00 billion) and Wellington Capital Management ($567 million).
Overall, 401 institutions hold 74.4% of company shares, with Fidelity, Wellington, Vanguard Group ($261 million) and Ameriprise ($260 million) being the largest holders with 12.5%, 7.1%, 3.4% and 3.4% of the outstanding shares respectively. GMCR trades at a growth-adjusted discount 16-17 forward P/E (based on projected December 2012 annual earnings) compared to the 14.4 average for its peers in the food wholesalers group, while earnings are projected to rise at a 49.0% compound growth rate from $1.64 in FY ending September 2011 to $3.64 in FY ending September 2013 (compared to . Also, it trades at 4.0 P/B compared to the average of 2.1 for its peers in the food wholesalers group.
Select stocks that mega funds as a group are bearish on (see Table) include supermarket chain Safeway Inc. (NYSE:SWY), in which they cut $88 million from a $2.06 billion prior quarter position; retail drugstore chain Rite Aid Corp. (NYSE:RAD), in which they cut $29 million from a $157 million prior quarter position; food and related products distributor Sysco Corp. (NYSE:SYY), in which they cut $186 million from a $4.72 billion prior quarter position; supermarket and convenience store chain Kroger Co. (NYSE:KR), in which they cut $183 million from a $5.01 billion prior quarter position; and drugstore chain Walgreen Company (WAG), in which they cut $275 million from a $9.17 billion prior quarter position. Furthermore, besides the undervalued positions listed above, mega funds as a group are also bullish on fast food restaurant chain operator and franchisor Yum! Brands Inc. (NYSE:YUM), in which they added $157 million to their $8.65 billion prior quarter position; and organic supermarket chain operator Whole Foods Market Inc. (NASDAQ:WFM), in which they added $383 million to their $3.88 billion prior quarter position.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.