Analyzing BlackRock's Top 7 Holdings

by: The Analyst Hub

BlackRock Financial Management, Inc. is an investment advisory and hedge fund firm founded by Robert S. Kapito. The firm is a subsidiary of BlackRock, Inc. (BLK). The firm caters to high net-worth individuals, banking or thrift institutions, pension and profit sharing plans, charitable organizations and corporations and manages over $150 billion in assets.

Investment Strategy: BlackRock Financial Management combines quantitative screens and risk analysis with fundamental research. It reduces the universe of potential candidates through proprietary screens. Each specific style determines which factors are reviewed in the screens. The BlackRock large-cap series team identifies companies that are trading at reasonable valuations, as well as possess quality management, strong earnings growth rates, and the potential for excellent long-term performance relative to the benchmark. The firm employs fundamental analysis to verify or reject the results of the model by evaluating data accuracy, growth quality, as well as the sustainability or feasibility of growth rates. The bottom-up stock selection is used to guide sector weightings.

The following is a list of its top holdings in the last quarter, as released in BlackRock's most recent 13F filing with the SEC.



Shares Held - 09/30/2011

% of Portfolio

Exxon Mobil Corp.




Apple Inc.




Chevron Corp.




International Business Machines




Microsoft Corporation




Johnson & Johnson




AT&T Inc.




My favorite long candidates among above stocks are Apple, Microsoft and IBM. However, I would like to avoid Exxon Mobil due to its greater-than-peers exposure to U.S. natural gas, as I am not bullish on U.S. natural gas fundamentals in the near term.

I like Apple despite of its last quarter earnings miss. This miss was largely due to customers holding back on new iPhone purchases before iPhone 4S launch in October. iPhone 4S is currently is currently seeing very strong demand, with over 4 million units sold in just three days after the launch in early October.

Recent read throughs from the earnings calls of AT&T (T),Verizon (VZ) and Sprint (S) have also indicated strong trends for iPhone 4S. The carriers have witnessed a slowdown in sales of Android and BlackBerry phones in addition to iPhone sales from Q2 to Q3. There is a good chance that a number of Android/BlackBerry customers also waited to switch to the iPhone 4S in October, and that’s why they delayed purchases.

Going forward, in the near term, Apple is likely to continue seeing strong demand on the back of holiday sales and anticipated iPad3 and iPhone5 launches next year. From a medium- to long-term perspective, Apple’s secular growth and market share gain story in the smart phone and tablet space is likely to continue for the next several years.

Apple's strategy of customer-centric innovation and launching products that have a potential to create whole new markets on their own is still intact and if one goes by Steve Job’s biography, Apple TV is likely the next such product in the line. At valuation of just 8.25x forward earnings (adjusted for cash), Apple is trading at very attractive levels and I believe it is a good opportunity to go long on the stock.

Microsoft Corporation is another interesting long candidate in the above list. Microsoft is engaged in developing, licensing and supporting a range of software products and services. The company also designs and sells hardware, and delivers online advertising to customers. It operates in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division.

Microsoft’s EPS forecast for the current year is 2.85 and next year is 3.13. According to the consensus estimates, its top line is expected to grow 6.50% in the current year and 6.90% next year. It is trading at a forward P/E of 8.61. Out of 33 analysts covering the company, 23 are positive and have buy recommendations, one has a sell recommendation and nine have hold ratings.

I find Microsoft a very attractive medium-term buy at 8.61x next year's EPS. At these levels, I don’t think the market is pricing in any of the positive initiatives the company is taking. Some of the important initiatives that can drive meaningful growth over the next one year are the Windows 8 launch, Office 365, which is gaining traction, and good adoption of Nokia's (NOK) WP7 phones.

In addition, Microsoft’s excess cash position provides a downside cushion. Microsoft recently raised its dividend by 25% and it has significant potential to increase its dividend pay-out ratio further to support the stock. I think Microsoft offers an attractive risk reward for investors who can hold the stock for the next year.

IBM is also a good long candidate. IBM’s stock has been a consistent performer in the past few years outperforming S&P 500 in 5 out of the past 6 years. I like the defensive nature of the business given that its high visibility annuity business accounts for more than 50% of revenue and 70% of profits which will support the company during downturn. Trading at around 13x forward earnings, the stock does not look pricey.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.