Legendary fund managers or gurus such as Warren Buffett, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, are well-known for their savvy in picking winning stocks year after year. Generally, their investment horizon and holding periods stretch into many quarters and years, sometimes even decades.
In this article, we examine, based on our research of their latest available Q3 institutional 13-F filings, the mega-cap stocks in the technology sector that they are most bullish and bearish about. Mega caps are generally defined as those companies with market valuations above $100 billion, a privileged group that includes between 40 and 50 companies traded on the North American stock exchanges. We interpolate the data on guru fund buying and selling activity in Q3 with those mega-cap technology stocks that are trading at discount valuation compared with their peers to come up with a select list of just four mega-cap technology stocks that trade undervalued and are being accumulated by guru funds, and those that were being sold by them in Q3.
The following are the mega-cap technology sector companies that guru fund managers are bullish about and that trade at undervalued levels compared with their peers (see Table):
International Business Machines (IBM): Big blue, as it is more commonly known in investing circles, is an American multinational technology and consulting corporation. It provides computer hardware and software, and it offers infrastructure, hosting and consulting services. This was the guru funds' biggest buy in Q3 in the group, and probably in the whole market, both in absolute and relative terms, as they added a net $6.00 billion, effectively more than doubling their $5.45 billion prior quarter position. Together, they hold an outsized 5.3% of the outstanding shares compared with their average 1.4% weighting for guru funds in mega-cap technology stocks. The top buyer by far was Warren Buffett's Berkshire Hathaway that added $6.22 billion in Q3 to its $4.77 billion prior quarter position; however, even beside Berkshire, eight other guru funds accumulated Big Blue in their portfolios in Q3.
IBM shares currently trade within striking distance of the all-time highs, and are undervalued, trading at 12-13 forward P/E compared with the 15.9 average for peers in the integrated computer systems group. Also, this behemoth of a company is still projected to grow earnings at a very impressive 13.2% annual growth rate from $11.59 in 2010 to $14.84 in 2012, while it has a good dividend yield of 1.5%. Although shares are a tad expensive compared with where the stock has traded in terms of its historic P/E range of 10-18, there is a lot to like with Big Blue and the stock should appeal to a wide cadre of investors, including dividend hunters to growth and value seekers.
Intel Corp. (INTC): INTC is one of the world's largest manufacturers of semiconductor chips, including microprocessors, chipsets, network processors, motherboards, non-volatile memory and storage. Its products are used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. Guru funds added a net $358 million in Q3 to their $2.34 billion prior quarter position in the company, and taken together they hold an out-sized 2.1% of the outstanding shares. The top buyers were Berkshire Hathaway ($227 million) and Hussman Econometrics Advisors ($85 million), and the top holder by far is Oakmark Funds/ Harris Associates ($1.39 billion).
INTC shares have traded generally range-bound for the last 10 years, between $15 and $30, and currently trade in the middle third of that range, up 16% YTD. Compared with its peers in the semiconductor space, INTC is undervalued, trading at 10-11 forward P/E and 2.7 P/B compared with averages of 14.6 and 3.7 respectively, while earnings are projected to rise at a modest 9.0% annual growth rate from $2.01 in 2010 to $2.39 in 2012. Also, it has an attractive annual dividend yield of 3.4%.
Cisco Systems Inc. (CSCO): CSCO is the worldwide leader in the manufacturing of IP-based networking and other products related to the communications and IT industry worldwide. Its products include switches, routers and other networking and communications hardware for corporate, education and government networks around the world. Guru funds added a net $273 million in Q3 to their $1.84 billion prior quarter position in CSCO, and together they hold an outsized 2.2% of the outstanding shares. The top buyer was First Eagle Investment Management ($171 million), and the top holders were First Eagle ($734 million) and Yacktman Fund ($580 million). Overall, 1,505 institutions hold 66.9% of the outstanding shares, with Vanguard Group ($3.93 billion) and State Street Corp. ($3.8 billion) being the largest holders with 4.0% and 3.9% of the outstanding shares respectively.
CSCO has also been in a trading range for the last 10 years, generally between $15 and $30, and currently trades in the bottom third of that range, down 10% year to date. CSCO is undervalued compared with its peers in the computer networking group, trading at a discount 9-10 forward P/E and 2.1 P/B compared with averages of 24.9 and 2.4 for the group. Also, it yields an attractive 1.3% dividend yield, almost non-existent among its peers in the group.
Google Inc. (GOOG): GOOG is the Internet's premier search engine. Guru funds added a net $403 million to their $2.46 billion prior quarter position, and taken together guru funds hold 1.2% of the outstanding shares, less than their 1.4% weighting among mega -caps in the technology sector. The top buyers were First Eagle Investment Management ($103 million) and Platinum Investment Management ($100 million), and the top holders are Lone Pine Capital ($546 million), Ruane Cunniff & Goldfarb Inc. ($426 million) and Fisher Asset Management ($410 million).
Overall, 1,416 institutions hold 81.2% of GOOG shares, with Fidelity ($10.22 billion), T Rowe Price ($5.93 billion) and Vanguard Group ($5.84 billion) being the largest holders with 6.8%, 3.9% and 3.9% of the outstanding shares respectively. GOOG trades at a discount 16-17 P/E on a trailing-twelve-month (TTM) basis compared with the 28.2 average for its peers in the internet services group, while earnings are projected to rise at a 21.7% compound growth rate from $29.61 in 2010 to $43.94 in 2012. Also, it trades at a discount 3.8 P/B and 14.6 P/CF compared with averages of 3.8 and 19.7 respectively for its peers in the internet services group.
The following are the mega-cap technology stocks that guru funds are most bearish about (see Table):
AT&T Inc. (T): AT&T is a leading global telecommunications services provider, offering local exchange, long distance, network access, and wireless services to consumers, businesses and other service providers. Guru funds hold a minor 0.06% of the outstanding shares, well below their 1.4% weighting among mega-cap technology stocks, and in Q3 they cut a net $34 million from their $133 million prior quarter position in the stock. The major seller in Q3 was Soros Fund Management ($40 million).
Vodafone Group Plc (VOD): VOD is a U.K.-based provider of digital wireless voice and data services. It is the world's largest international mobile communications company, offering its mobile voice services to over 350 million customers in over 40 countries. Guru funds cut a net $46 million in Q3 from their prior $357 million position in the company. They hold only a minor 0.2% of the outstanding shares, but that is understandable given that VOD is a U.K.-based company, with most likely many European and other non-U.S. institutional holders. The largest seller was Southeastern Asset Management ($73 million).
Verizon Communications (VZ): VZ is a diversified communications service provider formed by the merger of Bell Atlantic and GTE. It provides local exchange, network access, data, wireless and information services in the U.S. and over 150 countries. Guru funds cut a net $36 million in Q3 from their $136 million prior quarter position, and together they are severely under-weight in the company, holding a total 0.1% of the outstanding shares. The largest seller in Q3 was Soros Fund Management ($43 million).
Other mega-cap technology stocks with relatively minor activity by guru funds in Q3 included computer database software provider Oracle Corp. (ORCL), in which guru funds cut a minor net $9 million from its $1.26 billion prior quarter position; desktop computer software leader Microsoft Corp. (MSFT), in which they added a minor net $11 million to their $3.40 billion prior quarter position; leading provider of personal computers, mobile communications devices, and digital music players, and among the world's most innovative companies Apple Inc. (AAPL), in which they added a net $60 million to their $4.47 billion prior quarter position; and leading Hong Kong-based provider of digital wireless and data services to customers in China and Hong Kong, China Mobile Ltd. (CHL), in which they cut a net $12 million from their $51 million prior quarter position.
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Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market cap. That way, the list is not biased toward the largest companies in the group.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.