Top Q4 Undervalued Buys And Sells Of Eaton Vance's $45 Billion In 13-F Assets

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Includes: BTUUQ, COP, CVX, GLW, HPQ, KOG, PRU, USB, WFC, WMT
by: GuruFundPicks

Boston-based Eaton Vance Corp. offers mutual funds, tax-managed funds, closed-end funds, variable trust funds, managed accounts and wealth management services for individual and institutional investors as well as high net-worth and family office investors. Founded in 1924 as Eaton & Howard, prior to its 1979 merger with Vance, Sanders & Company, it is one of oldest investment management firms in the U.S. Eaton Vance Management has over $45 billion in 13-F assets per its latest Q4 filing with the SEC last week.

The assets are well-diversified into over 1,000 positions, with over 90% deployed in large-caps, and most of the remaining 10% in mid-cap equities. With such a well-diversified portfolio, it is understandable that it holds a position in most large-cap U.S. traded equities; hence, looking at just its holdings, or even its largest dollar moves would not be that useful. We focused instead on relatively large positions in which it added over 30% to its prior quarter position or where it similarly significantly cut a prior quarter position. The following are its major buys in Q4 based on that analysis, that are also trading under-valued compared to the peers in their group (see Table):

Kodiak Oil & Gas (NYSE:KOG): Denver-based KOG is an independent energy exploration and development company focused on exploring, developing and producing oil and natural gas in the Williston and Greater Green River Basins in the U.S. Rocky Mountains. Eaton Vance added a new $21 million position in the company in Q4. KOG shares have rallied strongly, having almost tripled from the $3.50s lows in early October to the highs above $10 earlier in the year. However, its shares still trade at a discount 8-9 forward P/E and 3.8 P/B compared to averages of 22.2 and 5.3 for its peers in the U.S. oil & gas exploration & production group, while earnings are projected to explode from 2c in 2010 to a projected 25c in 2011 and $1.04 in 2011.

Hewlett-Packard Co. (NYSE:HPQ): A Silicon Valley marquee company, HPQ is a leading provider of IT and outsourcing services, PCs and peripherals, printers and scanners, and servers and storage devices. Eaton Vance added $104 million to its $18 million prior quarter position in Q4. HPQ shares trade at a discount 6-7 forward P/E and 1.4 P/B compared to averages of 10.3 and 2.8 for its peers in the micro-computer group, while earnings are projected to fall from $4.88 in 2011 to $4.49 in 2013.

We believe that HPQ shares are cheap on a P/E basis for good reason, and we would avoid them until the company returns back to year-over-year growth sometime in 2013. HPQ reports well after the earnings season due to its October FY ending, and is scheduled to next report its January 2012 quarter on February 22nd after the market-close.

Chevron Corp. (NYSE:CVX): CVX is a California-based international integrated energy company with operations in approximately 180 countries. It is engaged in every aspect of the oil & natural gas industry, including exploration and production; refining, marketing and transportation; chemicals manufacturing and sales; and power generation. Eaton Vance added a massive $485 million in Q4 to its $242 million prior quarter position in the company.

CVX, along with many of its peers such as ExxonMobil Corp. (NYSE:XOM), is trading within striking distance of its highs for the year. Its shares trade at a discount 7-8 forward P/E and 1.8 P/B compared to averages of 16.5 and 1.3 for its peers in the international integrated oil & gas group, while earnings growth is projected to rise modestly going forward from $13.44 in 2011 to $13.55 in 2013. Earlier, on Friday, the stock ended up down 2.5% on a disappointing Q4 in which the company missed on both revenue and earnings estimates, with earnings falling to $2.58 v/s $2.64 in the prior year.

The following are select stocks in its portfolio that Eaton Vance heavily sold in Q3 (see Table):

Corning Inc. (NYSE:GLW): GLW manufactures glass substrates for LCDs, optical fiber and cables for communications, and ceramic pollution control products. Its LCDs are used in high-performance displays for TVs and smartphones, including in the venerable iPad. Eaton Vance cut $52 million in Q4 from its $96 million prior quarter position. GLW shares slid heavily this week, down 13.2%, after the company reported Q4 in which it beat revenue and reported earnings in-line with estimates, but forecast slowing growth ahead due to falling prices. At Friday's closing price of $12.62, the company trades at a steep discount of 8-9 forward P/E and 0.9 P/B compared to averages of 14.7 and 1.7 for its peers in the communications group, while earnings are projected to decline from $1.76 in 2011 to $1.52 in 2013.

Peabody Energy Corp. (BTU): BTU is engaged in coal production and sale through 28 operations in the U.S. and Australia. Eaton Vance cut $116 million in Q4 from its $305 million prior quarter position. The company recently reported Q4 last week in which it missed on both revenue and earnings estimates; its shares trade at a discount 7-8 forward P/E and 1.8 P/B compared to averages of 10.7 and 2.6 for the coal mining group, while earnings are projected to increase at 7.3% compound growth rate from $4.26 in 2011 to $4.90 in 2013.

Wal-mart Stores (NYSE:WMT): WMT is the world's largest retailer, and operates Wal-Mart and Sam's Club stores worldwide under discount, super-center and neighborhood market formats. Eaton Vance cut $157 million in Q4 from its $472 million prior quarter position. WMT shares have been range-bound for over ten years, and currently are trading at the top of that range, at a discount 12-13 forward P/E and 3.1 P/B compared to the averages of 15.2 and 3.7 respectively for its peers in the discount retail stores group. Also, it has an attractive 2.4% dividend yield, a strong balance sheet, and regular stock buybacks, and as a cost leader in the discount retail store category, it may fare well even if the economy continues to be weak going forward.

Wells Fargo & Company (NYSE:WFC): WFC is a diversified financial services holding company with 9,000 offices primarily in the U.S., and provides retail, commercial and corporate banking services. Eaton Vance cut $203 million in Q4 from its $1.10 billion prior quarter position. WFC trades at a discount 8-9 forward P/E, and at 1.1 P/B, compared to averages of 9.6 and 0.7 for the major regional banks group, which earnings are projected to rise at a 13.1% annual rate from $2.82 in 2011 to $3.61 in 2013.

Other select Stocks that Eaton Vance is bearish on based on its moves in Q4 (see Table) include Prudential Financial Inc. (NYSE:PRU), in which it cut $135 million from its $439 million prior quarter position; US Bancorp Inc. (NYSE:USB), in which it cut $135 million from its $467 million prior quarter position; and integrated oil & gas company ConocoPhillips (NYSE:COP), in which it cut $221 million from its $833 million prior quarter position.

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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

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

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