By Jose Escalada
Jeremy Grantham made a prestigious career out of avoiding the macro-economic bubbles that have made suckers out of the rest of us. His track record is remarkable, with predictions that include the credit crisis and the tech bubble. Grantham’s ability to detect and avoid investment bubbles had led to enviable professional success. He is a founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), an asset management firm with over $107 billion in assets under management. GMO’s holdings show where Grantham feels valuations are reasonable, away from bubbles.
Before the market correction, Grantham viewed low-quality companies as overvalued and saw significant risk in the broader stock market. By reviewing his largest equity positions for the quarter ending 6-30-2011 we can see what stocks Grantham believed were appropriate in times where he felt most asset classes (including stocks) were overvalued. Since we have seen a market correction and subsequent rally, revisiting Grantham’s positions stock prices from June may prove useful in constructing a portfolio for the current market.
Consider Johnson & Johnson (NYSE:JNJ), the largest holding in the GMO equity portfolio, accounting for 5.76% or $1.68 billion. Grantham bought shares of JNJ at an average price of $60.67 in the first quarter and sold 8.21% of his shares at an average price of $64.82 in the second quarter. Since the stock trades at $62.53 today, it would probably qualify as a ‘hold’ recommendation. Similarly, Grantham decreased Pfizer Inc. (NYSE:PFE) holdings from March through June by 7.66%. By the end of the quarter holdings accounted for $1.28 billion, or 4.39% of the GMO equity portfolio. Grantham’s trades in PFE have been less consistently based on price, which makes sense given the company has been facing patent cliff and acquisition issues. The fact that Grantham reduced his positions in these drug manufacturers suggests that he saw better investment opportunities outside of the sector.
Microsoft Corporation (NASDAQ:MSFT) may have been such an investment. MSFT holdings accounted for $1.62 billion, or 5.54% of the GMO equity portfolio after Grantham bought 5.98% more shares. This software giant was not the only software company that Grantham loaded up on during this period. He also added a bit to his position in Google (NASDAQ:GOOG) and almost tripled his position in Cisco Systems Inc. (NASDAQ:CSCO).
However, Grantham reduced his position in some tech sector firms. Grantham decreased ORCL holdings from March through June by 16.22%, making Oracle Corporation (NYSE:ORCL) holdings accounted for $1.29 billion, or 4.42% of the GMO equity portfolio. He also sold 18.06% of his Apple Inc. (NASDAQ:AAPL) holdings and 5.84% of his IBM holdings during this period.
How do ORCL and MSFT stack up at today’s prices? Grantham increased his MSFT holdings at an average share price of $25.06, much less than the $27.04 price the shares trade at today. At this higher price, MSFT is not as attractive. For ORCL shares, Grantham has been selling from his position since the stock rose above $24/share. ORCL currently trades at $31.53, which is even more richly valued.
Grantham bucked conventional wisdom by reducing holdings in consumer goods companies. Philip Morris International (NYSE:PM) holdings accounted for $1.18 billion, or 4.04% of the GMO equity portfolio. Like many consumer goods companies, Grantham decreased PM holdings from March through June by 12.24%. Grantham reduced his holdings in many other consumer companies like Pepsico, Inc. (NYSE:PEP), which he trimmed by 8.98%. For shares of PM, Grantham has bought at average quarterly prices as high as $60.71, and has sold in the second quarter at an average of $67.88. Since PM is currently trading at $68.19, it is not a buy.
It appears that Grantham, like many professional investors, considers valuation more than conventional wisdom about which sectors are defensive. What does this mean for investors in today’s market? What prices were acceptable or unacceptable for each stock according to trading in the GMO portfolio? It appears that Grantham’s largest holding are no longer attractive buy candidates at today’s prices, according to this year’s GMO trading.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.