Large-Cap Retail Stocks Most Favored By The World's Largest Fund Managers

by: GuruFundPicks

The S&P Retail Index ($RLX) has staged a strong recovery, rising to almost three-fold from the bottom of the 2008/09 recession, and is up about 15% YTD after just 3% appreciation in 2011. While the global economy continues to be in the doldrums, and the domestic unemployment numbers are still weak, housing is beginning to show less weakness and consumer confidence is slowly rising. Meanwhile, many retailers have staged a strong recovery in earnings growth since the recession, and others are showing improving same-store sales growth.

While it appears that 2012 may not be the year the U.S. economy picks up strongly, the stage may indeed be set for recovery next year, and retail stocks should do well in that scenario. In this article, via an analysis based on the latest available Q1 institutional 13-F filings, we identify the large-cap retail sector company stocks that are being accumulated and those being distributed by the world's largest fund managers.

These mega fund managers, such as Fidelity Investments, Goldman Sachs, BlackRock Inc., Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bullish on the retail group, adding a net $2.77 billion in Q1 to their $352.37 billion prior quarter position in the group. However, overall they are still under-weight the group by a factor of 0.8; that is, taken together, the 25 mega funds have invested 5.2% of their assets in the group, less than the 6.8% weighting of the retail sector in the overall market (for more general information on these mega funds, please look at the end of the article).

The investing activities of these mega fund managers in small-cap and mid-cap retail sector companies were covered in a prior article, and our coverage of the group in the prior quarter can be found here. The following are the large-cap retail sector companies that these mega fund managers are most bullish about (see Table):

Autozone Inc. (AZO): AZO is a leading operator of over 4,800 retail auto parts stores nationwide and in Mexico and Puerto Rico, offering automotive parts and accessories that focus primarily on do-it-yourself (DIY) customers. Mega funds together added a net 1.03 million shares in Q1 to their 12.93 million share prior quarter position in the company, and taken together mega funds held $5.34 billion or 36.7% of the outstanding shares.

The top buyer was Wellington Management, one of the largest private independent investment management companies in the world, with $634 billion in assets under management, that purchased 0.62 million shares. Other large mega fund purchasers included mutual fund powerhouse Fidelity Investments (0.39 million shares), with $555 billion in 13-F assets, mutual fund powerhouse Janus Capital Management (0.37 million shares), with over $96 billion in 13-F assets, and JPMorgan Chase & Co. (0.23 million shares), with $1.4 trillion in assets under management. Overall, institutional investors added 1.8 million shares to their 29.4 million share prior quarter position.

AZO has been a stellar long-term performer rising over four-fold since hitting bottom in the 2008/09 recession, and up almost six-fold in the past decade, benefiting from a multi-year trend of fewer new cars sold as a result of the ailing economy. In its latest Q3 (MAY), the company reported revenues in-line and beat analyst earnings estimates ($6.28 v/s $6.25), with same-store sales up 3.9% and also gross margins up slightly year-over-year.

Its shares currently trade at 14 forward P/E compared to the 27.7 average for its peers in the retail/wholesale auto parts group, while earnings are projected to grow at an annual rate of 17.6% from $19.58 in 2011 to $27.10 in 2013. Historically, the company has traded in a 10-18 PE range, on a TTM (trailing-twelve-month) basis versus the current P/E of 16.9, at the high end of that range, which maybe all the more significant if the multi-year trend of fewer new cars sold begins to seriously unwind as the economy bottoms-out going forward.

Certainly recent announcements from its peers O'Reilly Automotive Inc. (ORLY) and Advance Auto Parts (AAP), as well as improving new car sales numbers, seem to indicate that the industry maybe at an inflection point, and that there is a risk that the weak macro-economic conditions that benefited the group for the last five years may reverse. It is possible, in that case, to look at mega funds buying into the stock as a way to hedge their other holdings, as any negative macro-economic news is likely to benefit the auto supplier group while negatively impact most other market sectors.

Other large-cap retail sector companies that mega fund managers are bullish about include:

  • Wal-Mart Stores (WMT), one of the world's largest retailers, and operator of Wal-Mart and Sam's Club stores worldwide under discount, super-center and neighborhood market formats, in which mega funds together added a net 7.46 million shares to their 427.74 million share prior quarter position in the company;
  • Lowe's Companies Inc. (LOW), a home improvement retailer operating 1,749 stores in the U.S., Canada and Mexico, in which mega funds together added a net 13.59 million shares to their 451.83 million share prior quarter position in the company;
  • Grainger WW Inc. (GWW), that distributes tools, lighting, plumbing and other maintenance products in the U.S., Canada, Japan, Mexico, India, Puerto Rico, China, Colombia and Panama, in which mega funds together added a net 1.20 million shares to their 26.54 million share prior quarter position in the company; and
  • Automotive parts store chain operator O'Reilly Automotive Inc. , in which mega funds together added a net 2.22 million shares to their 46.19 million share prior quarter position in the company.

The following are large-cap retail sector companies that mega funds are bearish about (see Table):

  • Kohl's Corp. (KSS), that operates over 1,000 family-oriented, specialty department stores in the U.S., in which mega funds together cut a net 4.25 million shares from their 122.45 million share prior quarter position in the company;
  • major discount chain retail store operator Target Corp. (TGT), in which mega funds together cut a net 1.94 million shares from their 269.34 million share prior quarter position in the company; and
  • Macy's (M), that operates 850 department stores in 45 states, D.C., Puerto Rico and Guam, in which mega funds together cut a net 1.63 million shares from their 166.96 million share prior quarter position in the company.

Furthermore, the following are additional large-cap retail sector companies that are among the top holdings of mega funds in the group (see Table):

  • CVS Caremark Corp. (CVS), that is a leading integrated pharmacy services provider in the U.S., including the nation's largest pharmacy chain, and a provider of pharmacy benefit management services, in which mega funds together hold 485.83 million or 37.9% of the outstanding shares;
  • Walgreen Company (WAG), that operates a chain of over 7,800 drugstores in 50 states, D.C. and Puerto Rico, selling prescription and non-prescription drugs, and general merchandise, in which mega funds together hold 256.48 million or 29.7% of the outstanding shares;
  • Whole Foods Market Inc. (WFM), an operator of 299 organic supermarkets in 38 states, Canada, and the U.K. featuring organically grown foods, in which mega funds together hold 71.76 million or 39.1% of the outstanding shares; and
  • Sysco Corp. (SYY), that distributes food and related products to the food-service industry via 180 distribution centers in the U.S. and Canada, in which mega funds together hold 177.41 million or 30.3% of the outstanding shares.


General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

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

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

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