Wellington Management Company, LLP is an investment advisory and hedge fund firm managing over $300 billion in equity assets. The firm manages Hartford series of funds in addition to other funds. WMC caters to individuals, institutions and pension and profit sharing plans, charitable organizations, banking and corporations.
Investment Strategy: Wellington Management employs various strategies covering domestic and international markets. The firm looks for attractive investments across different market-cap and style spectrums. The investment process generally involves understanding global trends and outlooks for securities and sectors, and evaluating potential candidates on valuation, models, opinion and recommendations from different sources. The global value strategy focuses on financially sound companies that are out of favor, display potential for above average returns, and are selling at low P/E ratios.
The stock selection process combines fundamental research and valuation analysis from both quantitative and qualitative perspectives. Investments are primarily made in large-cap companies in developed markets, as well as in global companies located in emerging markets. Wellington Management Company also applies capital markets, currency, macroeconomic and technical analyses. The firm carries out proprietary research shared by various teams located globally.
In this article, I would be discussing some of the top buys from Wellington Management, as released in its most recent 13F filing.
SIRIUS XM Radio Inc. (SIRI): My Take - Buy
Wellington Management bought 83,497,727 shares of Sirus XM last quarter. Sirius XM Radio Inc. provides satellite radio services in the United States and Canada. The company broadcasts approximately 135 channels, including music, sports, entertainment, comedy, talk, news, traffic, and weather channels on subscription fee basis through two satellite radio systems.
Sirius offers a differentiated consumer value proposition based on a broad and unique content line-up, seamless integration into the car and ease of use, and ubiquitous network coverage. I believe this will drive continued growth. Sirius' business model is characterized by low capital intensity, high operating leverage and incremental margins, pricing power, and lack of substitute products. All these factors make its business attractive.
The company has not seen any increase in churn rates which remains stable at 1.9% despite of its recent price hike. This pricing power is definitely going to be an important driver of SIRI's valuation going forward. According to U.S SAAR numbers, auto sale for February has exceeded the expectations. This is also positive news as majority of its subscriber base is derived from auto sales. In addition there is a lot to watch in 2012 and beyond, with further contribution from used cars, roll out of Sirius 2.0 and the launch of internet based on-demand services.
Cisco System, Inc. (CSCO): My Take - Buy
Wellington Management bought 30,095,861 shares of Cisco last quarter. Cisco Systems designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide and provides services associated with these products and their use. Cisco's products are installed at large enterprises, public institutions, telecommunications companies, commercial businesses and personal residences.
Cisco recently posted impressive Q2 2012 results as revenues grew by 10.8% y-y against guidance of 8% and EPS of $0.47, versus consensus estimates of $0.43, driven by growth in routing and switching revenues. Cisco's routing revenues grew by 8.2%, clearly outperforming its competitor Juniper (JNPR). Its switch business also showed a turnaround with 8% y-y growth from declines in the recent quarters.
Looking forward, trends in the routing business seem positive as Cisco is gaining market share, while Juniper is struggling with its product timing. Cisco's switches business is also expected to continue doing well with product refreshes in the Catalyst and Nexus lines. Margins are also expected to improve due to pricing power from product refreshes. Overall, I believe Cisco is well positioned for steady 6%-8% growth. With improving margins, product refreshes and a strong execution capability, there is good upside potential for the stock price in the near term.
ArcelorMittal (MT): My Take - Buy
Wellington Management bought 7,779,361 shares of ArcelorMittal last quarter. ArcelorMittal is a global steel producer. ArcelorMittal produces flat products, including sheet and plate, long products, including bars, rods and structural shapes, and stainless steel products. The company operates in five segments: Flat Carbon Americas; Flat Carbon Europe; Long Carbon Americas and Europe; Asia, Africa and Commonwealth of Independent States, and Distribution Solutions.
I am bullish on the stock as I believe that there is more upside than downside for the steel cycle from current levels. The stock is trading near its 2009 lows, despite the fact the company's financials are now in a much better position as compared to 2009. There is a possibility of further reduction in debt through strong focus on working capital and potential non-core asset disposals. I recommend a buy on the stock from a long term perspective.
Merck & Co., Inc. (MRK): My Take - Buy
Wellington Management bought 4,359,510 shares of Merck last quarter. 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.
The Dow Chemical Company (DOW): My Take - Sell
Wellington Management bought 14,813,125 shares of Dow last quarter. Dow is the second-largest global chemical company providing chemical, plastic and agricultural products and services to diverse markets. In the short term, I am worried about Dow's major commodity exposure - the olefins chain - which is getting adversely affected by lower prices due to sluggish demand and inventory destocking. In addition, tighter-than-expected ethane markets leading to higher-priced feedstocks are adversely impacting the margins. In the medium term Dow's high operating and financial leverage makes the stock very susceptible to the downside, in case we enter another slowdown.