Following on from my last article on Joel Greenblatt (Trades, Portfolio), his impressive historical returns and simple strategy of buying high quality, cheap stocks, let's look at the current investments this investment manager holds in his portfolio to see the strategy in action.
According to Gotham Asset Management LLC's most recent 13F SEC filing, at the end of September, the five largest Holdings as a percentage of assets under management were Walmart (WMT, Financial), Apple (AAPL, Financial), Verizon Communications (VZ, Financial), Home Depot (HD, Financial) and Amazon (AMZN, Financial).
In my last article, I highlighted Greenblatt's Gotham Index Plus Fund as an example of how he is still able to achieve market-beating returns despite the current market environment. The top holdings in this fund are Apple, ExxonMobil (XOM, Financial), Walmart, Cisco Systems (CSCO, Financial) and Johnson & Johnson (JNJ, Financial).
What is interesting to note about both of these portfolios is that the top holdings are all S&P 500 constituents. It seems that the managers of both of these funds, which includes Greenblatt, believe that it is possible to find value in the current market in the large-cap space, without having to take on the excess risk of investing in small caps -- a fascinating perspective.
Another thing to note about all of these companies is that they are leaders in their respective fields. Walmart and Apple, for example, are both industry leaders, trading at relatively attractive valuations today compared to history. The same can be said for companies like Exxon Mobil and Cisco Systems. Although these may not be the most popular companies around at the moment, they remain leaders in their respective fields and are currently trading at undemanding multiples.
Value in large caps
It is easy to criticize these holdings for not being inventive enough. Indeed, Greenblatt invented the magic formula; surely he should be able to find undervalued, unloved small caps with multi-bagger potential in the current market? You could argue this point, but at the same time, there's a solid argument that could take the opposite stance: Why should Greenblatt invest in small caps when there is plenty of value to be found in the large-cap universe, investing in companies that have significant, established reputations in their respective industries and are currently trading at discount valuations.
The same pattern is also apparent in Warren Buffett (Trades, Portfolio)'s portfolio. As I reported several weeks ago, the Oracle of Omaha was busy buying stocks throughout the third quarter, spending around $12 billion mostly upping his position in Bank of America (AC). The bank has gone from being a relatively insignificant position in the Berkshire Hathaway portfolio (only warrants) to the conglomerate's second-largest equity position behind Apple, which is also a relatively new position.
To a certain extent, both Buffett and Greenblatt are limited in the companies they can add to portfolios. With multi-billion dollar portfolios to manage, they can only invest in large companies that have the potential to move the needle.
Small caps are just too, well, small to make a significant impact on a multi-billion portfolio. I think the portfolio moves also show that these seasoned value hunters believe there is plenty of value to be found in the large-cap space.
Over the past few years, the majority of the S&P 500's gains have been concentrated in just a few securities, companies like Amazon, Facebook (FB, Financial) and Netflix (NFLX, Financial). Others have been left behind by the rally. Indeed, some stocks have even entered a bear market, fighting against the tide. It seems these managers believe that there is plenty of value to be found in these overlooked securities. It is an exciting investment strategy to consider in a market environment that is becoming increasingly volatile.
Disclosure: The author owns shares in Berkshire Hathaway.
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What Is Joel Greenblatt Buying TodayÂ
