Malvern, Pa.-based The Vanguard Group manages approximately $1.6 trillion in assets, including $741.0 billion in 13-F assets per its latest Q1 filing with the SEC. It is one of the largest institutional investors, accounting for about 4% of the total market capitalization of the U.S. equity markets. Its investment in the basic materials and energy sectors alone amounts to over $100 billion, more than the entire 13-F assets of most institutional investors focused on natural resources.
Vanguard offers mutual funds and other financial products to its clients, including ETFs, individual retirement accounts, college savings accounts, and variable annuities, as well as personal advisory services. Its assets are well-diversified into over 3,700 positions, with two-thirds deployed in large caps, another 20% in mid-caps, and the remaining 10%-15% in small-cap equities. It holds positions in most mid- to large caps as well as many small-cap basic materials and energy companies. Hence, we focused our efforts on analyzing the equity holdings in its Q1 2012 13-F to determine its highest conviction bets by sector, 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 in the basic materials and energy sectors that are undervalued and have a high dividend compared to their peers, and are also trading at prices lower than they did in Q1 (see table below):
Excelon (EXC): Excelon is engaged in the generation and distribution of electricity to 5.4 million customers in Pennsylvania, and Illinois. It generates electricity from nuclear, fossil, hydroelectric, and renewable sources. Vanguard added $353 million to its $1.00 billion position in Q1.
Other leading institutions making large bullish bets on EXC in Q1 include Franklin Resources adding 16.3 million shares to its 15.0 million share prior quarter position, and mega fund State Street Corp. adding 8.0 million shares to its 33.6 million share prior quarter position. EXC shares currently trade near $36, below the $38-$42 range they traded at most of last quarter, when Vanguard, Franklin Resources and State Street made their large bullish bets. Furthermore, overall funds added a net 66.0 million shares in Q1, buying/adding 105.8 million shares and selling/decreasing 39.8 million shares.
EXC reported its Q4 earlier this month, on May 4th, with revenues that were in line and beating analyst earnings estimates (85 cents vs. 80 cents), but down year over year from $1.17, partly on account of the mild winter, and also due to the integration costs of its merger with Constellation Energy. Also to blame were the low prices of natural gas that reduces the amount electrical utilities can charge, and hence the profits of utilities like EXC that derive most of their generation from sources other than natural gas.
EXC shares have fallen off over 15% YTD, currently trading near multiyear lows at 12 forward P/E and 1.4 P/B compared to averages of 18.8 and 1.3, respectively, for its peers in the electric utilities group. Also, it has a high-yielding dividend of 5.7% compared to the average of 4.1% for its peers in the group. From the moves by major funds in Q1, it seems that many leading managers believe that shares were attractively priced in Q1, and with the subsequent Q1 beat and a further fall in price, EXC shares are priced even more attractively at these levels.
Vale SA (VALE): Rio De Janeiro, Brazil-based VALE is one of the world's leading mining companies, and specializes in the mining of iron ore and pellets, manganese, alloys, gold, copper, potassium, and kaolin. Vanguard added $47 million in Q1 to its $393 million prior quarter position. Other leading institutions making large bullish bets on VALE in Q1 include billionaire and investment legend Ken Fisher's Fisher Asset Management adding 9.6 million shares to its 11.6 million share prior quarter position, and Goldman Sachs Group adding 2.6 million shares to its 14.4 million share prior quarter position.
In its latest Q1 (March), VALE reported that revenues were in line and earnings missed analyst estimates by a penny (74 cents vs. 75 cents), but both well below last year's Q1 results, at 21% and 46% lower, respectively. The shares are down about 15% YTD, and they trade at 5 forward P/E and 1.3 P/B compared to averages of 20.9 and 2.2, respectively, for its peers in the miscellaneous mining group, while earnings are projected to fall from $4.23 in 2011 to $3.67 in 2013. Also, VALE has a higher dividend yield of 6.4% compared to the 2.0% average for its peers.
The P/E contraction in VALE's shares is based mostly on the assumption that Chinese growth and the demand for iron ore will flatten after its earlier torrid growth, when it quintupled between 2000 and 2012. But it is likely that Chinese growth may continue unabated, albeit at high single-digit rates, that world demand may pick up some of that slack, that pricing remains strong, and that profits get a boost from lower costs tied to VALE's use of its very large ore carrier ships.
Barrick Gold (ABX): ABX is a Canadian company engaged in production of gold and copper in Peru, Canada, U.S., Australia, Chile, and five other countries. Vanguard added a new $26 million position in Q1. Other leading institutions making large bullish bets on ABX in Q1 include Allianz Global Investors adding a new 7.4 million share position, and basic materials focused Van Eck Associates, with $20.6 billion in 13-F assets, adding 4.4 million shares to its 31.2 million share prior-quarter position.
ABX reported its Q1 (March) earlier this month, on May 2, missing on both analyst revenue and earnings estimates ($1.09 vs. $1.10). Its shares are down about 9% YTD, and they trade at 6-7 forward P/E and 1.6 P/B compared to averages of 10.0 and 2.6, respectively, for its peers in the gold mining group. Also, it has a higher dividend yield at 2.1% compared to the average of 0.5% for its peers in the group.
The following are additional basic materials and energy stocks that Vanguard is bullish about, accumulating shares in them in Q1 2012 (see table below):
- WPX Energy\ (WPX), that is engaged in natural gas, oil, and natural gas liquids exploration and production in the U.S., in which it added $173 million in Q1 to its $7 million prior quarter position;
- Superior Energy Services (SPN), that provides specialized oilfield services and equipment for the production and drilling needs of oil and gas companies, in which it added $67 million in Q1 to its $96 million prior quarter position;
- Petroleo Brasileiro SA (PBR), a Brazilian company engaged in the exploration, production, supply and distribution of oil and gas in Brazil and abroad, in which it added $58 million in Q1 to its $475 million prior quarter position;
- Suncoke Energy (SXC), the largest independent producer of high-quality metallurgical coke in North America, in which it added $56 million in Q1 to its $1 million prior quarter position;
- Cobalt International Energy (CIE), that is engaged in the exploration and production of oil primarily in the deepwater of the U.S. Gulf of Mexico, and in offshore Angola and Gabon in West Africa, in which it added $56 million in Q1 to its $108 million prior quarter position;
- Suncor Energy (SU), that is an integrated energy company, engaged in the development of petroleum resource basins in Canada's Athabasca oil sands, in which it added a new $29 million position in Q1; and
- Cheniere Energy (LNG), an operator of LNG receiving terminals and natural gas pipelines in the Gulf Coast of the U.S., in which it added $27 million in Q1 to its $90 million prior-quarter position.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, 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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