PNC Financial's Best Performing Top Buys

Includes: ACE, GOOG, M, MCD, NC, OGE, OKS
by: The Analyst Hub

PNC Financial Services Group (NYSE:PNC) manages $43 billion in equity assets, primarily through its investment advisory subsidiary PNC Wealth Management, which controls the PNC series of mutual funds.

Investment Strategy

PNC employs both growth and value approach to investing. The firm primarily invests in small- to large-cap companies, utilizing a combination of fundamental and quantitative analysis. The firm utilizes a top-down approach in allocating assets and a bottom-up strategy in selecting stocks. PNC holds stock for the long term and has a very low turnover of 15.20% annually.

The following is a list of its best performing top buys from the last quarter.



Shares Held - 06/30/2011

Shares Held - 09/30/2011

Change in share price (Sept. 30, 2011 - till date)

Mcdonald's Corp.





OGE Energy Corp.





Oneok Partners L.P.





Macy's Inc.





Google Inc.





Nacco Industries Inc.





ACE Limited





Source: 13F filing

My favorite long candidates among above stocks are McDonald's, ACE Limited and Google. I see a good likelihood of these stocks continuing their outperformance in the near term.

McDonald's Corp. and its franchisees and affiliates operate approximately 33,000 quick service restaurants that generate over $70 billion in annual system-wide sales. Roughly 43% of sales are generated domestically (US), with Europe (30% of revenue) and APMEA (19% of revenue) as the next largest markets. McDonald's has a scale and pricing power that few others possess in a rising cost environment.

In the US, the company plans to remodel 800 units in 2012, on top of the 600+ in 2011 whilst maintaining its strength in value positioning (particularly relative to food at home pricing, which has risen sharply while McDonald's has taken up price more modestly). This combined with operational focus on increasing peak throughput (dual drive-throughs, new POS) will have a positive impact on its US business. In Europe, the structural gap between McDonald's and peers is quite wide and I believe high/low menu innovation and 950 remodels (vs. 1000 in FY11) should continue to strengthen company's presence in market space. The company expects 90% of its interiors and two-thirds of its exteriors to be reimaged in Europe by the end of 2012, up from 75% and 40% today, respectively. In APMEA, value breakfast/lunch continue to resonate with consumers especially in China where focus remains for unit development including 225-250 for 2012, and an implied acceleration to 300+ in 2013, as the company targets 2,000 units by 2013 from 1,400 today.

Going forward, McDonald's is likely to continue driving solid same store sales through the combination of pricing, product innovation, remodels, and compelling value offerings. McDonald's has a long-established history of annual dividend increases. The business is performing well across the globe, and the company's competitive position is getting stronger as it gains share. Earnings visibility remains above average, with potential upside as McDonald's gets more aggressive taking price. I believe it makes sense to buy the stock given the company's sales leadership position, market share gains and earnings visibility.

ACE Limited is a global insurance and reinsurance organization, with operating subsidiaries in more than 50 countries and serving customers in more than 140 countries. The company underwrites commercial risks of all sizes, and provides reinsurance as well as specialized insurance products - such as personal accident, supplemental health, crop insurance, etc.

I believe ACE offers stronger relative top and bottom-line prospects than the broader non-life sector, both over the short and long term. It has exposure to a number of product and geographic areas where fundamentals are more positive today. The company generates more than 20% of its premium volume from accident and health, which is benefitting from improved economic conditions, especially internationally and more than 10% of premiums are from crop insurance, which is not subject to price competition. Geographically, the company generates approximately 40% of its non-life and life insurance business from outside US which has better margins.

ACE has come through this insurance cycle in a better relative position than peers and is focusing on underwriting profit, rather than market share or size. It has demonstrated a mix of business that has generated 15% ROEs and 15% growth in tangible Book Value over the last decade. Going forward, ACE Limited may benefit the most from the pricing improvements in the property casualty space. Even a flattening rate environment could offer ACE's disciplined underwriters opportunities to add market share while also raising rates in selected lines -- a prospect that has not been available for several years. I believe the stock makes a good buy and the company can show good growth even if one assumes a flattish rate environment.

I also like Google Inc. Google, the world's #1 search engine and online advertising company, is a defensive stock with a high growth rate. The company's leadership position in its core search business is what makes it a defensive stock. Its main competitors, Bing (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) 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 undermonetized. 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 about 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.

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