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Boston-based Eaton Vance Corp. (EV) 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 $47.2 billion in 13-F assets per its latest Q1 filing with the SEC on Wednesday.

The assets are well-diversified into over 1,300 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 its high conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its high conviction bullish positions, that are trading at a discount to their peers in the group, and also outperforming their peers in terms of being up recently and trading near 52-week, multi-year or all-time highs (see Table):

Honeywell Intl Inc. (HON): HON is a diversified technology and manufacturing company that provides aerospace products and services, automation and control solutions, performance materials and technologies, and automotive products to customers worldwide. Eaton Vance added $118 million in Q1 to its $59 million prior quarter position. Other leading institutions with large bullish bets on HON in Q4 (the latest quarter for which most institutional filings are available) included Boston-based MFS Investment Management, with over $265 billion in assets under management, adding 1.4 million shares to its 27.4 million share prior quarter position.

HON shares have been strong recently, trading near all-time highs, and up more than 40% from the lows in October of last year. Its shares trade at 11.8 forward P/E and 4.2 P/B compared to averages of 11.9 and 1.9 for its peers in the diversified operations group, while earnings are projected to grow at a strong 14.6% annual rate from $3.79 in 2011 to $4.98 in 2013.

Merck & Co. (MRK): MRK is a research-driven global pharmaceutical company engaged in developing prescription drugs to treat asthma, osteoporosis, cardiovascular, metabolic and other disorders. It also develops vaccines, biological therapies, animal health, and consumer products. Eaton Vance added $104 million in Q1 to its $443 million prior quarter position. Other leading institutions with large bullish bets on HON in Q4 (the latest quarter for which most institutional filings are available) included mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets, adding 8.6 million shares to its 43.9 million share prior quarter position, and mega fund manager JPMorgan Chase & Co., with $1.3 trillion in assets under management, including over $217 billion in 13-F assets, adding 7.6 million shares to its 59.8 million share prior quarter position.

MRK shares are currently consolidating in a tight 10% range for the last three months after a rally last year carried it near four-year highs, driven mostly by earnings growth derived from cost-cutting initiatives, as the company continues to struggle against looming concerns over patent expirations that are expected to continue pressuring the top-line over the next few years. The shares currently trade at 10-11 forward P/E and 2.1 P/B compared to averages of 11.7 and 4.1 for its peers in the large cap pharmaceuticals group, while earnings are projected to fall from $3.77 in 2011 to $3.70 in 2013. Besides, MRK also offers an attractive dividend yield of 4.4%, well above the 3.3% average for the group.

The TJX Companies Inc. (TJX): TJX is a leading off-price apparel and home fashions retailer in the U.S. and internationally, operating its stores under the T.J. Maxx, Marshalls, Winners, HomeSense, HomeGoods and T.K. Maxx trademarks. Eaton Vance added $256 million in Q1 to its $380 million prior quarter position. Other leading institutions with large bullish bets on TJX in Q4 (the latest quarter for which most institutional filings are available) included mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets, adding 6.9 million shares to its 40.1 million share prior quarter position, and New York-based Bank of New York Mellon Corp., with over $1.2 trillion in assets under management, including $239 billion in 13-F assets at the end of Q4, adding 2.2 million shares to its 12.9 million share prior quarter position.

TJX shares are currently trading at all-time highs, up about 30% YTD on top of a 40% gain in 2011. However, they still trade at a reasonable 15-16 forward P/E and 9.6 P/B compared to averages of 16.3 and 4.4 for its peers in the discount retail group, while earnings growth is expected to continue at a strong 15.2% annual rate from $1.99 in 2012 to $2.64 in 2014. Also, recently the company raised its quarterly dividend by 21% to 11.5c/share, so that its dividend yield of 1.1% is well above the group average of 0.6%.

The following are additional companies that Eaton Vance is bullish about, accumulating shares in them in Q1 (see Table):

  • Ford Motor (F), that manufactures automobiles under the Ford and Lincoln nameplates, offers a wide range of after-sales vehicle services and products, and also offers vehicle financing, leasing and insurance services, in which it added $192 million in Q1 to its $3 million share prior quarter position;
  • Paccar Inc. (PCAR), a designer, manufacturer, and distributor of light-, medium-, and heavy-duty trucks and related aftermarket parts primarily in the United States and Europe, in which it added $152 million in Q1 to its $25 million share prior quarter position;
  • Regions Financial Corp. (RF), a holding company for Regions Bank that provides a range of commercial, retail and mortgage banking services in the U.S. via 1,772 offices in 16 states in the South and the Midwest, in which it added $143 million in Q1 to its $6 million share prior quarter position.
  • Gilead Sciences Inc. (GILD): Gilead is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, in which it added $128 million in Q1 to its $35 million share prior quarter position; and
  • Citigroup Inc. (C), a global financial services company providing consumers, corporations, governments and institutions with a range of financial products and services, including banking, investment, insurance and credit card and other services in more than 160 countries, in which it added $124 million in Q1 to its $374 million prior quarter position.

The following are Eaton Vance's high conviction bearish picks, based on its Q1 selling activity (see Table):

  • 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, in which it cut $375 million in Q1 from its $426 million prior quarter position;
  • Apple Inc. (AAPL), probably among the most innovative companies the world has ever known. Apple is the maker of the iPhone, iPod and iPad, was founded by the late Steve Jobs, and is one of the world's largest manufacturers of personal computers, mobile communication devices, and portable digital music players, in which it cut $310 million in Q1 from its $1.81 billion prior quarter position;
  • Amgen Inc. (AMGN), that develops therapeutics based on cellular and molecular biology to treat anemia, cancer, and inflammatory diseases, in which it cut $220 million in Q1 from its $600 million prior quarter position;
  • Philip Morris International Inc. (PM), a manufacturer of cigarettes sold worldwide under the Marlboro, LM, Parliament, Virginia Slims and other brands, in which it cut $153 million in Q1 from its $607 million prior quarter position;
  • Wal-Mart Stores (WMT), one of the world's largest retailers, and operator of Wal-Mart and Sam's Club stores worldwide under discount, super-center and neighborhood market formats, in which it cut $147 million in Q1 from its $321 million prior quarter position;
  • UnitedHealth Group Inc. (UNH): UnitedHealth is a diversified health and well-being company, serving more than 70 million Americans, in which it cut $144 million in Q1 from its $762 million prior quarter position; and
  • Baker Hughes Inc. (BHI), that provides wellbore products and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the global oil and natural gas industry, in which it cut $115 million in Q1 from its $131 million prior quarter position.

Table

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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.

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.

Source: Top Undervalued High Conviction Outperforming Picks From Eaton Vance's $47 Billion Q1 Filng