Friday, July 23, 2010

Yacktman 2Q 2010 Letter

Some excerpts from the most recent Yacktman quarterly letter:

High Quality Holdings
It surprises some that we have achieved such strong outperformance while having large weightings in well-known stocks like Coca-Cola, PepsiCo, Pfizer, and Microsoft, as these companies are not exactly undiscovered or underfollowed.

We strive to be as objective as possible in evaluating all opportunities, and if the best businesses in the world are available at compelling valuations we are willing to own big positions in them. We sleep well at night knowing that dominant, well capitalized companies purchased at attractive valuations should produce solid results over time, even in a world with an extreme amount of uncertainty.

We are also willing to own lower quality businesses, but we have to project a meaningfully higher expected rate of return on the investment. Currently, we think most of the best values are in the highest quality companies.

Well-established, Slowly Changing Markets
We like businesses that sell products in well-established, slowly changing markets like beverage, household products, personal care, and food. These "consumer staple" products typically sell at low price points and are consumed and repurchased frequently.

Category leaders like Coca-Cola in soft drinks or Tide in laundry detergents may continue their dominance for generations, making it easier to predict the future prospects of these businesses. We are extremely confident that Clorox will be the leader in bleach sales in 10 years, while we are less certain about who will be the dominant seller of cell phones even a few years from now.

Yacktman's largest positions include: Coca-Cola, NewsCorp, Pepsi, Clorox, Pfizer.

On Pepsi
Frito Lay, the most valuable division of PepsiCo, is the dominant snack chip company in the world. This business has significantly higher market share than any of its competitors, and its dominant market share produces substantially higher margins than most other packaged food companies. Strong distribution and innovation have allowed Frito Lay to grow faster than other large food companies.Outside of snack chips, PepsiCo has a collection of solid businesses including Pepsi, Tropicana, Quaker Oats, and Gatorade.

On Coca-Cola
Coca-Cola products account for nearly 3% of beverage consumption around the world. Increased per capita consumption and global expansion have driven more than a century of growth. Today, Coca-Cola is primarily an international company; the stagnant North American business is a minority of operating profits. Due to a strong presence in key emerging markets, we expect Coca-Cola's growth will continue for a long time in the future.

Yacktman and his team have a very solid long-term track record.

Adam

With the exception of NewsCorp and Clorox, long positions in each stock mentioned.

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