JP Morgan's Best Performing Top Buys

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 |  Includes: CBS, COP, GOOG, ITUB, MON, MRK, OXY
by: The Analyst Hub

J.P. Morgan Chase and Co. (JPM) manages ~ $200 bn in equity assets primarily through its asset management subsidiary JP Morgan Asset Management. It caters to high net-worth individuals, corporations, pension and profit sharing plans, charitable organizations and institutions.

Investment Strategy: J.P. Morgan Asset Management offers various strategies, including active extension, behavioral, core, enhanced, growth, long/short, quantitative and value. Investments are carried out through U.S., international and global portfolios. Emphasis is placed on identifying and monitoring key valuation and risk metrics. For the domestic investments, the J.P. Morgan Asset Management primarily employs fundamental research to identify favorable investments. A three-step process is applied, combining research, valuation and stock selection. J.P. Morgan purchases companies that are undervalued and considers selling them when they appear to be overvalued. In addition to valuation, it looks for a catalyst that could prompt a rise in a stock's price, a high potential reward compared with potential risk, or temporary mispricings due to market overreactions.

The following is a list of its top buys from the last quarter which have outperformed S&P500 significantly.

Stock

Symbol

Shares Held - 06/30/2011

Shares Held - 09/30/2011

Shares Bought Last Quarter

% change in share price since 09/30/2011

Google Inc.

GOOG

1522808

2599211

1076403

20.03%

Occidental Petroleum Corporation

OXY

12853137

19050254

6197117

25.57%

Merck & Co. Inc.

MRK

52519744

59766649

7246905

16.03%

Conocophillips

COP

14251066

17883747

3632681

12.51%

CBS Corp

CBS

25320552

35303650

9983098

28.23%

Itau Unibanco Banco Holding SA

ITUB

15892771

25745407

9852636

15.96%

Monsanto Co.

MON

1297997

3785961

2487964

12.40%

Click to enlarge

Source: 13F filing

My favorite long candidates among above stocks are Merck, Google and Monsanto.

Merck is trading at a forward PE of just 9.9x forward PE, a discount to other major pharmaceutical companies. It also has a very attractive dividend yield of 4.5%. One of the reasons for Merck's lower valuation is its weak pipeline in terms of dollar contribution. However, one should note that Merck actually has the highest number of potential new launches and the least patent exposure in the group. Strong commercial launch of Victrelis and strong data from pipeline assets (i.e. Odanacatib, Tredaptive, Anacetrapib) could provide an upside.

Google is the world's #1 search engine and online advertising company. Google is a defensive stock with high growth rate. The company's leadership position in its core search business is what makes it a defensive stock. Its main competitors, Bing and Yahoo Search, have been unable to pose any meaningful threat to Google-- despite burning a good amount of cash. From a growth perspective, Google is likely to post a double digit growth rate for the next several years as a secular shift of advertisers from traditional media to online media continues. Its mobile business is likely to be another major growth driver.

Many of Google's web properties are under monetized. For example, only 3% of YouTube videos are monetized through video advertising. This can increase significantly going forward. I see big potential from the recent announcement by Google that it will be launching 100 online video channels on YouTube that feature new original programming from celebrities such as Jay-Z, Madonna, Shaquille O'Neal and Tony Hawk. This venture will generate ~25 hours of new, on-demand, original content per channel per day, and Google is reportedly paying up more than $100 million in advance to its content partners. I believe this and similar partnerships can potentially have a very big impact in the long run, as more and more original content comes online through these partnerships. Quality content is likely to bring in more advertisers, and thus help in further monetization of Google's properties.

Google is trading at a forward PE of just 14x, despite the expected 20% top and bottomline growth next year. Although some investors are worried about increasing dominance of Facebook, I think it's too premature to say that Facebook can adversely affect Google's core search and advertising business. I find the risk-reward profile of Google very attractive at these levels.

Monsanto is another good buy in the current uncertain environment, given the defensive nature of seeds, prospects for double-digit earnings growth and a reasonable valuation. Monsanto is trading at 17.5x Forward PE and has a dividend yield of 1.7%. I see limited downside risk to earnings given growth prospects in biotech seeds and low sensitivity to the economic cycle. Also, I am quite bullish on the commodity prices given the excess amount of money supply that has entered the system thanks to bailouts, quantitative easing and stimulus. In particular, when we talk of food grains where demand is inelastic, the trend is likely headed up in the mid-long term, even if we consider a prolonged recession scenario. This translates to higher farm income and an improved value proposition for Monsanto's grower customers, which should support price/mix.

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