by Charles Sizemore | July 31, 2012 1:35 pm
Every now and then, it is nice to take a peek over the shoulder of a successful investor to see what their high-conviction buys are. When you read a headline that “Warren Buffett is buying Company X,” you’re naturally inclined to do a little digging into Company X’s financials. After all, if it’s good enough for Buffett, it might be good enough for you.
You have to be careful with this line of thinking, of course. The SEC filings that disclose large investors’ holdings usually are pretty dated by the time we get access. For all we know, the conditions that made a guru buy a given stock might no longer be valid by the time we read about it, and there are no guarantees that they haven’t already sold it. For these reasons, I tend to focus on larger holdings — the conviction buys they are likely to hold onto for a while.
Today, I’m going to look at one high-conviction dividend stock each from five well-known superinvestors. My criteria is simple enough: The stock must be a significant holding in the guru’s portfolio, and it must pay a respectable dividend.
Here’s a closer look at each one:
We’ll start with Mr. Buffett. Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) has been accumulating shares of retail behemoth Wal-Mart (NYSE:WMT), and it’s not hard to understand why.
Wal-Mart is exactly the kind of company that Buffett is famous for buying. It has a dominant position as the leading discount retailer in the world. It has competitive “moats” in its size and logistical efficiency that competitors have a hard time scaling. And naturally, it’s attractively priced. Wal-Mart trades for 14 times 2013 expected earnings and at 0.55 times sales. Its 2.1% dividend, while not exceptionally high, is growing at a nice clip. Wal-Mart raised its dividend 9% last year and 20% the year before.
Our next guru is David Einhorn. Einhorn is better known for some of his high-profile short positions — he even wrote a book about his short of business development company Allied Capital, Fooling Some of the People All of the Time — but he certainly is not afraid to make large, concentrated long bets as well.
As of his most recent filings, former high-flyer Apple (NASDAQ:AAPL) was his largest holding by a wide margin at fully 15% of Greenlight Capital’s publicly traded long portfolio.
It is debatable whether Apple should be considered a “dividend stock” given that the company only recently started paying a dividend and yields less than the broader S&P 500. Still, given Apple’s gargantuan $100 billion cash hoard and continued shareholder agitation, it is safe to assume the dividend will be rising in the years ahead.
Joel Greenblatt of Gotham Capital is one of my favorite gurus. His “Magic Formula” is one of the best stock screeners I have ever come across, and he gives away access to it for free. I’ve stumbled across more great investment ideas than I can count from browsing his site, and I recommend that you give it a look.
Greenblatt is heavily invested in defense firms these days, and one that caught my eye was Northrop Grumman Corporation (NYSE:NOC).
Northrop Grumman is not a “high conviction” pick of Greenblatt, per se, as its weighting is not materially higher than any of his other holdings. It is, however, a highly profitable company selling at a very attractive price. Northrop Grumman trades for just 9 times expected 2013 earnings and yields an impressive 3.3% in dividends.
Next on the list is Bill Ackman, Greenblatt’s former partner at Gotham Capital and the principal of Pershing Square Capital Management. Ackman is an activist investor with a history of taking large positions in companies and then agitating for radical change.
One such company in need of radical change is the iconic American retailer J.C. Penney (NYSE:JCP). Penney is Ackman’s largest position, comprising fully 17% of his portfolio. The company recently cut its dividend and is in the midst of an existential crisis, so we’ll move down the list to his first dividend stock of any size, diversified REIT General Growth Properties (NYSE:GGP).
A retail REIT might raise eyebrows when consumer spending appears to be slowing, but investors don’t appear to be worried. General Growth is up 20% year-to-date, roughly double the return of the S&P 500.
With a yield of 2.2%, General Growth certainly is not a big income generator, particularly by REIT standards. Still, a reliable 2.2% is attractive in a low-yield world.
As a side note, Ackman has a large position in Sizemore Investment Letter recommendation Beam Inc. (NYSE:BEAM), the maker of Jim Beam bourbon whiskey. Though not much of a dividend stock, it is attractive as a recent spin-off and as a money-minting sin stock.
Finally, we come to Mohnish Pabrai, author of the Dhandho Investor and one of my favorite investors. Pabrai is known for running a highly concentrated portfolio, and for good reason. As of his most recent filings, two-thirds of his portfolio was invested in the financial sector.
Pabrai’s largest holding that pays a dividend of any size is Wall Street super-bank Goldman Sachs (NYSE:GS), which yields a modest 1.8%.
Pabrai is betting big on the financial sector, and Goldman alone accounts for more than 19% of his portfolio. To say that this was a “high-conviction” investment for Mr. Pabrai would be an understatement.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sizemore Capital is long WMT. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
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