4 Long Ideas From Vanguard's Top Buys, 1 To Avoid

Includes: AAPL, ECL, EMN, ETN, TEL
by: The Analyst Hub

Founded by John C. Bogle in 1975, Vanguard Group, Inc. is a client-owned investment advisory firm. The firm manages the Vanguard series of mutual funds in addition to other funds and caters to individual and institutional investors.

Investment Strategy: Vanguard Group, Inc. is a global investor that employs both active and passive strategies, investing across all market caps and various industries. The firm adheres to value and growth investment styles, including their combination. The firm typically constructs diversified portfolios. Vanguard employs both top-down and bottom-up approaches for its investment process. Quantitative modeling is used to assess different security factors, including growth prospect, relative return potential and valuation.

The following are some of its top buys from the last quarter according to its latest 13F filing with SEC.



Shares Held - 09/30/2011

Shares Held - 12/31/2011

Change in shares

Apple Inc.





TE Connectivity Ltd.





Ecolab Inc.





Eastman Chemical Co.





Cooper Industries Plc





I believe Apple, TE Connectivity, Ecolab and Eastman Chemical make good buys at current levels. However, I would recommend avoiding Cooper Industries.

Apple recently reported excellent quarterly numbers beating even the most optimistic estimates. Its guidance was also better than expected with strong momentum in iPhone and iPad sales. Going Forward, Apple has two good catalysts in 2012 in the form of the iPad3 and iPhone5 launch. From a medium- to long-term perspective, Apple's secular growth and market share gains in the smartphone and tablet space is likely to continue for the next several years. Apple's strategy of customer-centric innovation and launching products with potential to create whole new markets is still intact. If one goes by Steve Jobs' biography, Apple TV is likely the next such product in the line. At a valuation of just 9x forward earnings (adjusted for cash), Apple is trading at very attractive levels. I believe it is a good opportunity to go long the stock.

TE Connectivity Ltd., is the world's largest manufacturer of electronic connectors. It serves the automotive, appliance, aerospace, defense telecommunications, computer, and consumer electronics industries. Last quarter the company announced lower then expected results. The main cause of last quarter's revenue miss was weakness in telecom late in quarter. This was offset by solid results in the transportation (auto) segment, where operating margins reached 16%. I believe the current quarter is the bottom and expect trends to improve from here onwards. In the long term the company is likely to see continued growth in its auto end market, which is expected to benefit from the increasing electronic components in an automobile. Currently, hybrid-electric vehicle production is running at a 1-million unit run rate. However, in the next few years it is expected to reach upwards of 10 million, which will definitely help the company.

The company remains in a strong financial position, targeting to achieve free cash flow equal to its net income. Trading at ~10x forward earnings, I believe the stock presents a good buying opportunity.

Ecolab Inc. is the global leader in cleaning, sanitizing, food safety and infection control products and services. Ecolab's PE multiples contracted after it announced acquisition of Nalco Holdings (NYSE:NLC) last year. Investors are concerned that Ecolab's proposed acquisition of Nalco will diminish Ecolab's earnings consistency and the combined company would be more cyclical. I think investors' concerns are misplaced. Ecolab will contribute 63% of proforma EBITDA of the combined entity, hence Ecolab's resiliency will be largely intact. Further Nalco's operating income trends are more similar to Ecolab than perceived (Nalco's EBITDA fell just 5% in 2009). Also, demand for Nalco's products products and services are stronger than for Ecolab's. However, given its high leverage, Nalco was undercapitalized and growth was hampered due to the lack of funds for acquiring complementary technologies and for capacity expansion where needed. I think Ecolab can manage Nalco better and improve Nalco's growth rate.

I think investor concerns will diminish going forward as Ecolab posts a few quarters of consistent earnings. Ecolab is currently trading significantly below historical ranges. There is a good upside if Ecolab shares are able to go back to historical valuation levels (forward P/E of 24x).

Eastman Chemical Company is engaged in the manufacturing and sale of chemicals, plastics, and fibers in the United States and internationally. The company operates in four segments: Coatings, Adhesives, Specialty Polymers, and Inks; Fibers; Performance Chemicals and Intermediates; and Specialty Plastics.

I see a lot of positives from Eastman's recent acquisition of Solutia Inc. (NYSE:SOA). The Eastman-Solutia combination is expected to present operational synergies and new growth opportunities. This deal also extends Eastman's reach into Asian markets and is expected to help reduce cyclicality of its business. It is also expected to boost Eastman's product mix in the Specialty segment.

Further, business trends seem to be favoring Eastman. Eastman chemical is a high-quality chemical business that benefits from unique and complex vertical integration into ethylene and propylene production from natural gas liquids. Propylene prices are moving up while isobutene's prices are lowering, resulting in high margins.

I believe the Solutia acquisition along with market leading, competitive position in key products will lead to superior financial performance in the near term and recommend investors to buy the stock.

Cooper Industries Plc is engaged in the manufacturing, marketing and selling of electrical products and providing services worldwide. Since the market trough in mid-August '11, CBE has significantly outperformed the XLI and the S&P 500 (NYSEARCA:SPY). CBE now trades at a greater premium to its historical valuation than any stock in the group. I don't see any reason to buy an electrical product company so late in the cycle and would recommend avoiding it.

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