By Matt Doiron
Since the end of June and finishing next week, hedge funds are disclosing their holdings in 13F filings for the second quarter of 2012. These filings disclose many of the large long positions that hedge funds and other large investors hold as of the end of the quarter, allowing retail investors to see what their holdings are and try to figure out what these managers are thinking. Diamond Hill Capital, which is managed by Ric Dillon, has already filed. Let's take a look at the 10 largest positions in Diamond Hill's portfolio this quarter versus last quarter, with new top positions for the second quarter in bold:
Q1 2012 (share count in parentheses)
Q2 2012 (share count in parentheses)
Occidental Petroleum (2.9 million)
Occidental Petroleum (3.5 million)
Anadarko Petroleum (3.3 million)
United Technologies (3.2 million)
United Technologies (3.0 million)
Abbott Laboratories (3.7 million)
Abbott Laboratories (3.7 million)
Pfizer (9.8 million)
Pfizer (9.4 million)
Medtronic (5.8 million)
Medtronic (5.4 million)
EOG Resources (2.4 million)
Procter & Gamble (3.1 million)
Pepsico (2.8 million)
Microsoft (6.0 million)
Kimberly-Clark (2.4 million)
Pepsico (2.9 million)
JPMorgan Chase (5.5 million)
PNC Financial Services (2.8 million)
Procter & Gamble (3.2 million)
Looking more carefully at the filings, Diamond Hill sold out of its Anadarko (APC) position and slightly increased its Microsoft (MSFT) and PNC Financial (PNC) positions, though the latter two fell out of the top 10 holdings by market value as their stock prices failed to keep up with other positions. The fund had owned 1.6 million shares of EOG Resources (EOG), 2.7 million shares of JPMorgan Chase (JPM), and 900,000 shares of Kimberly-Clark (KMB) at the end of the first quarter. Here are three themes that we see in Diamond Hill's activity:
Reorienting its energy position. The fund dropped out of its Anadarko Petroleum position and partly made up for it by increasing its holdings in Occidental Petroleum (OXY) and EOG Resources. In the case of Occidental the fund may have been thinking in straight value terms: currently Occidental's trailing P/E ratio is 12 versus Anadarko's 16, with both companies taking similar hits to their revenue recently. EOG has been growing its revenue and earnings as it capitalizes on its position in the Eagle Ford Shale, and is only priced at 21 times trailing earnings. Given Anadarko's recent troubles, it may be better positioned to deliver value in the future and that may be why Diamond Hill reallocated some of the proceeds from its sale of Anadarko sales towards this particular oil & gas company.
JPMorgan Chase. As we've noted, Jamie Dimon thought his bank was underpriced at $34.14. At the end of June it traded at $35.73 and at its lows for the month fell to $31. The bank is likely being hit by poor sentiment due to its London Whale-related trading losses, as well as general dissatisfaction with the banking industry and financial sector, that are pulling the stock price away from the company's fundamental value- it currently trades at less than nine times trailing earnings. We think that Diamond Hill was smart to double its JPMorgan Chase position in the second quarter and that the fund will get good returns here.
Defensive portfolio. The fund was invested fairly defensively in the first quarter. Aside from its top two stocks being energy companies, it owned four healthcare stocks, a stable consumer stock, United Technologies, a bank, and Microsoft - one of the most stable, dependable technology companies in the market. Anadarko was the only one that currently pays a dividend yield of under 2.4%. The portfolio looks similar now - Anadarko has been replaced by low-yielding EOG, and two more stable high-yield stocks have replaced Microsoft and PNC as those stocks have dropped slightly below the top-10 threshold. We have discussed JPMorgan Chase already. Kimberly-Clark's personal care products (including Kleenex) are about as consumer staple as it gets, and the company trades at 18 times trailing earnings with good recent earnings growth and a 3.5% dividend yield. Diamond Hill more than doubled the size of this position. It looks likely to us that the fund is worried about U.S. macro, and at the very least does not want to get into stocks in growth areas of the economy (aside from getting some exposure to oil & gas) at this time.
Disclosure: I am long MSFT.