Blue-Chip Stocks Still On Sale
Don Yacktman has never seen bargains like this before. “I’ve been managing money for more than 40 years, and never before have so many large, profitable companies sold as cheaply relative to the market as they do today,” he says.
True, high-quality stocks were cheaper at the market bottom in early 2009, as well as in late 1974. But so was everything else. Even with all of today’s economic headwinds -- anemic growth in the U.S. and much of Europe, sky-high unemployment, depressed housing prices -- the market offers, in Yacktman’s opinion, a remarkable opportunity. It’s a view I share.
Yacktman, founder and co-manager of the eponymous Yacktman Fund (symbol YACKX) and Yacktman Focused Fund (YAFFX), owns such wonderful businesses as Cisco Systems (CSCO), Coca-Cola (KO ), Johnson & Johnson (JNJ), Microsoft (MSFT), PepsiCo (PEP) and Procter & Gamble (PG) -- just to name a handful of his funds’ top holdings. All boast low debt along with large and sustainable profit margins -- the hallmarks of high-quality companies.
But here’s the best part: Most of these stocks are selling at average or below-average price-earnings ratios relative to the overall stock market. Standard & Poor’s 500-stock index currently trades at 14 times analysts’ estimated earnings for the coming 12 months. Yacktman Fund’s holdings, on average, trade at just 13 times anticipated earnings.
One of two things almost has to happen. Either a lot of low-quality companies will substantially boost their earnings so that they can justify their high P/Es or, far more likely, prices of high-quality stocks will rise relative to low-quality issues until the blue chips again command the kind of premium P/Es that they have historically.
Yacktman, 69, makes investing sound simple -- and right now, it just may be. “If you buy above-average businesses at below-average prices, you win,” says Yacktman, who manages both funds with Jason Subotky and with his son, Stephen. Don Yacktman has plenty of experience with winning. Over the past ten years through August 1, Yacktman Fund returned an annualized 11.2%, beating the S&P 500 by an average of 8.7 percentage points per year and putting it in the top 1% of large-company value funds. Year-to-date, the fund has returned 4.9%, beating the index by 1.5 points and placing it in the top 8% among its peers.
Yacktman’s biggest weightings are in what I think are the market’s most attractive sectors -- whether stocks overall go up or down from here. One-third of the stocks in Yacktman Fund are in the consumer-staples area, 17% are in health care and 16% are in technology.
Yacktman is fond of what he calls “old tech.” These are the once-mighty glamour stocks of the 1990s, the ones that commanded triple-digit P/Es before the tech sector imploded in 2000. Back then, Yacktman wouldn’t give these stocks a second glance. Today, he’s buying.
Consider Microsoft. At its August 2 close of $26.81, the stock trades at a bit more than 9 times analysts’ forecasted earnings of $2.87 per share for the fiscal year that ends June 2012. Yes, the company faces serious challenges. It’s unlikely to ever market another product as big as Windows. And CEO Steve Ballmer seems unable to channel the firm’s mammoth cash flow into exciting new products. “We own it in spite of Mr. Ballmer,” Yacktman says. “There’s a ton of value in this company, and it’s still very profitable.” He adds: “It’s hard to disappoint on something that’s selling at ten times earnings.”
Another controversial stock and Yacktman’s largest holding (at about 11% of assets in both funds) is Rupert Murdoch’s News Corporation (NWS). News Corp. is enmeshed in a giant scandal in England over hacking by reporters at one of his newspapers (since shut down) into private telephone messages, as well as other invasions of privacy. The allegations against Murdoch and News Corp. are sensational. But the effect on News Corp.’s revenues and profits is decidedly limited, says Yacktman. “You’ve seen a tiny piece of the company shut down, and most of the rest is political theater,” he says. “As the price of the stock goes down, the future rate of return goes up.” (For more on News Corp., see STOCK WATCH: Should You Buy a Scandal-Tainted Company?)
Most of the companies in Yacktman’s fund are earning a large and growing percentage of their revenues from fast-growing emerging markets. The U.S. economy is stuck in slow gear, and the rest of the developed world is in no better shape. But emerging markets continue to thrive, and new consumer classes in these countries are clamoring for the kinds of consumer goods and services Yacktman’s companies sell.
Buy Yacktman Fund. Its annual expense ratio is 0.85%, and turnover last year was just 10%. Yacktman appears to have inculcated his son and Subotky with his investment methods. Yacktman Fund currently owns just 38 stocks, compared with 34 for Focused. Both funds are good, but I prefer Yacktman Fund because it is slightly less concentrated.
Or buy some Yacktman stocks. Great companies at P/Es below the market average offer an opportunity that I, for one, can’t resist.
Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.