GuruFocus provides information on 147 investment managers, hedge funds and mutual funds that can help guide your own investment choices. With that many portfolios, it can be difficult to narrow down which gurus to follow.
Every investor has different circles of competencies; I breakdown which gurus have a majority of their portfolio in some of the most common industries. For instance, whether or not you prefer to stay away from high-tech stocks could determine if you want to follow Warren Buffett (Trades, Portfolio) or Jean-Marie Eveillard (Trades, Portfolio).
In this article, I’ll examine four industries: basic materials, consumer cyclical, consumer defensive, and financial services. In part two, we’ll look at healthcare, industrials, and technology.
Basic Materials
Over the past year, stocks in the basic materials sector have been down 1.73%. The industry is defined as companies that extract and/or refine chemicals, metals, wood and paper products, and containers and packaging products.
Bill Ackman (Trades, Portfolio) of Pershing Square Capital Management holds 21% of his portfolio in Air Products & Chemicals Inc., a supplier of hydrogen and helium. Air Products’ stock has been up 17% since the start of the year.
Consumer cyclical and defensive companies constituted the bulk of Ackman’s portfolio before the investor entered the basic materials industry in 2013.
Daniel Loeb (Trades, Portfolio) of Third Point LLC holds 21.9% of his portfolio in the basic materials industry through seven companies. Dow Chemical (DOW, Financial) is the largest holding at 22 million shares and 13.9% of the portfolio.
Dow manufactures and sells chemicals, plastic materials and agricultural products, among others. Its products are sold in about 160 countries. The company’s stock has risen 20% since the beginning of the year.
In the first quarter 2014 shareholder letter, Loeb wrote that he believes Dow is under-earning its potential in the petrochemical business, and management had not yet adequately addressed it. He concluded that Dow’s integrated strategy does not maximize profits.
Other holdings include agricultural company CF Industrial Holdings (CF, Financial) and Masco Corp (MAS, Financial), a building materials firm.
From 2011 to June 2013, technology was the dominant sector in the portfolio, constituting about 35-45%. Since then, Loeb has reduced tech stocks to about 14% in favor of basic materials.
Consumer Cyclicals
- Alan Fournier (Trades, Portfolio)
- Mario Gabelli (Trades, Portfolio)
- David Tepper (Trades, Portfolio)
The consumer cyclical sector has been up 5.34% in the past year. The industry includes companies involved in automobiles, homebuilding, textiles and apparel, hotel, casino, and leisure. The key to investing in cyclicals is successful timing — entering the market at the bottom of a down cycle right before an upturn, and exiting at the top.
In 2009, David Tepper (Trades, Portfolio) of Appaloosa Management did just that, and managed to earn $7 billion by betting that government wouldn’t let big banks fail during the financial crisis. Tepper bought shares of Bank of America when it was trading under $3, and shares of Citigroup for under $1. When the market eventually improved, Appaloosa posted an incredible return of 132.72%, beating the S&P 500 by 106.3 percentage points. Instead of financial services, cyclical stocks currently make up the majority of Appaloosa’s portfolio at 25.9% through 11 companies.
The largest position of this industry is in General Motors (GM, Financial) at 12,982,349 shares and 6.6% of the portfolio. Tepper’s portfolio is well diversified within the cyclical industry, with four positions in autos, three in travel and leisure, two in entertainment, and one each in homebuilding and manufacturing.
Mario Gabelli (Trades, Portfolio)’s GAMCO Investors holds 178 positions in the cyclical industry, with the top four in entertainment companies: Viacom (VIA, Financial), Madison Square Garden (MSG, Financial), Time Warner (TWX, Financial), and Twenty-First Century Fox (FOXA, Financial).
Gabelli has gradually increased the sector weighting of cyclical stocks since 2009 and has kept it at about 20% since September 2013.
In the past 15 years, GAMCO’s Asset Fund Class AAA has only had three years that failed to beat the S&P 500.
Alan Fournier (Trades, Portfolio) of Pennant Capital holds 24.1% of the firm’s portfolio in cyclical stocks through seven companies. Priceline Group (PLCN, Financial) is the largest position at 291,839 shares and 6.3% of the portfolio.
The next largest holding is in NVR Inc. (NVR, Financial), a homebuilding and construction company, with 226,802 shares, followed by Carter’s (CRI, Financial), Signet Jeweler’s (SIG, Financial), Ascena Retail Group (ASNA), Wabco Holdings (WBC), and Mattress Firm Holding Corp (MFRM).
Since 2012, cyclical stocks have gradually replaced industrials as the dominant sector in Pennant’s portfolio.
Consumer Defensive
The consumer defensive industry has been up 10.13% over the past year. The sector can be defined by companies engaged in processing and production of food, beverages, and tobacco, manufacturers of household and personal products, and providers of personal services.
The demand for these products does not react readily to the economy, and present opportunities for slow and steady growth. Investors can use defensive stocks to diversify and complement holdings the turbulent cyclical and technology sectors.
Warren Buffett (Trades, Portfolio) holds 24.4% of Berkshire Hathaway’s portfolio in consumer defensive stocks, second only to his favorite financial services industry.
The top holding is Coca-Cola (KO), of which he has consistently held 400 million shares over the past five years. As a true defensive stock, Coca-Cola has had consistent growth over the time period.
Buffett’s other six defensive stocks in order of portfolio weighting are Wal-Mart (WMT), Procter & Gamble (PG), Costco (COST), Graham Holdings (GHC), Mondelez International (MDLZ), and Kraft Foods (KRFT).
Donald Yacktman (Trades, Portfolio) of Yacktman Asset Management holds the majority of his portfolio in the sector at 38.7%. The holdings are well diversified with five in consumer packaged goods, two in non-alcoholic beverages, two in defensive retail, and two in tobacco products.
PepsiCo (PEP) is the largest holding with 31,517,996 shares and 11.4% of the portfolio. Procter & Gamble (PG) is the second largest, while Coca-Cola (KO) is third.
Yacktman has consistently placed a majority of the portfolio in defensive stocks since 2008. The strategy has served him well — his 15-year cumulative return averages 10.4% per year, compared to the S&P 500’s 4.7% per year.
Financial Services
The financial services sector consists of companies engaged in retail and commercial banking, insurance, real estate, investment trusts and other financial services. The industry has been up 9.65% over the past year.
Buffett holds 45.6% of Berkshire Hathaway’s portfolio in financial stocks through 10 companies. His love of financial stocks is well known; David Rolfe (Trades, Portfolio) of Wedgewood Partners has estimated Buffett has a bigger stake in bank stocks than any other U.S. investor, besides mutual funds.
One reason is Buffett’s strategy of investing in industries other businesses need in order to run their operations. Two of these, of course, are insurance and bank capital.
Buffett’s largest holding in the industry is Wells Fargo (WFC) at 463,458,123 shares, which accounts for 22.6% of the portfolio and 8.88% of shares outstanding. By generating almost half of revenue from fees, Wells Fargo has managed to reduce their sensitivity to interest rates and credit risk, according to a CNBC analysis.
The second largest holding is American Express (AXP) at 151,610,700 shares, or 13.4% of the portfolio and 14.49% of shares outstanding. Buffett hasn’t changed the number of stocks over the past five years. What makes American Express appealing is that it directly lends to consumers, unlike its rivals Visa (V) and MasterCard (MA), both of which Buffett also owns stakes in.
In an interview with Barron’s in June, Bill Nygren (Trades, Portfolio) of Oak Mark Funds said he believes there’s still opportunity in financials, even though others might believe U.S. stocks are fully valued. Looking at his long-term returns, it seems Nygren was right: His five- and 10-year cumulative returns are 22.4% and 8.8% per year respectively, compared to 17.7% and 7.4% for the S&P 500.
Nygren holds 31.6% of the portfolio in the sector through 15 companies, the largest of which is Bank of America (BAC) at 29,700,000 shares and 3.3% of the portfolio.
Nygren told Barron’s that Bank of America is selling at two-thirds of its book value, and believes they will be earning about 10% on the book value within a few years.
Franklin Resources (BEN) is the second largest at 5,430,000 shares and 2.3% of the portfolio, followed by MasterCard at 4,380,000 shares and 2.3% of the portfolio.
“MasterCard has a tremendous tailwind because of the global conversion of cash transactions to plastic,” Nygren said. He expects the company will have above-average growth far into the future.
To view the portfolios of more gurus, visit our Guru page. Check back for part two of this article to examine three additional sectors.
