Thursday, February 3, 2011

Yacktman Portfolio: Big Cap Household Names

Donald Yacktman and his team have a very solid long-term track record. Over the past ten years the cumulative return of the S&P 500 is 15% while both of the Yacktman Funds (YAFFX & YACKX) are up more than 200% over the same time frame.

At the end of the most recent quarter, Yacktman continued to hold and build positions in large capitalization stocks that are household names. These are relatively concentrated portfolios with ~35-40% in the top 5 stocks depending on the fund.

Top 5 Holdings
1 News Corp (NWSA)
2 Pepsi (PEP)
3 Coca-Cola (KO)
4 Microsoft (MSFT)
5 Procter & Gamble (PG)

So 3 of the top 5 are consumer staples. There's also minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB). Here are some thoughts on technology stocks from the Yacktman Funds 4Q 2010 Letter:

Technology
Last year the technology index rose more than 10%, however a few of the larger, more established companies like Microsoft and Cisco Systems declined.   The technology sector typified the general investment environment last year, where more "exciting" stories generally performed better than more stable, established value.  We think that will reverse sometime soon. 

Microsoft's shares declined modestly last year even though the company produced exceptional operating results.  Today the shares sell at about 10 times earnings and free cash flow per share after netting out excess cash on the balance sheet. We believe Microsoft has solid growth ahead and its shares are extremely inexpensive.

In the fourth quarter, we purchased a small position in Cisco Systems, another former tech‐bubble darling which now has a value‐priced stock.  Since 2000, Cisco's shares have fallen more than 75% from their peak even though the sales and earnings per share of the business have more than doubled.  The company has a strong balance sheet and solid management and sells for approximately 12 times 2011 earnings after adjusting for net excess cash.

At the very least, it's worth noting that value-oriented managers like Yacktman (who wouldn't touch a tech stock a decade ago due to extreme overvaluation) are moving into the Microsoft's and Cisco's of the world.

Adam

Long positions in PEP, KO, MSFT, and PG
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