Cribbing From the Best

Successful investors prospect for new ideas in a wide variety of ways. They scour databases for undervalued companies. They tap industry contacts for early signs that things are getting better for a company or a sector. They read voraciously and draw from deep experience to see patterns and opportunities that others are missing. For some savvy practitioners, a fertile source of investing ideas is to look at what other smart investors are doing.

Spilling the beans. Every quarter, money managers with more than $100 million in assets must file a form with the Securities and Exchange Commission that details the U.S.-traded stocks they own. The disclosure lets you figure out what they’ve been buying and selling. Filings are made up to six weeks after the end of the quarter, so the information is less useful than if it were in real time. But a review of the data can provide insights into where opportunities may reside. As Bruce Berkowitz, manager of Fairholme Fund, a member of the Kiplinger 25, says, “Why wouldn’t you look at what other great investors have found?”

For that reason, we founded a newsletter, SuperInvestor Insight, that is dedicated to tracking the activity of 30 market-beating, value-oriented hedge-fund managers, plus Warren Buffett’s Berkshire Hathaway (see Bigger Berkshire, Trimmer Price). We focus less on what any one investor, such as Buffett, Paulson & Co.’s John Paulson or Baupost Group’s Seth Klarman, is doing, and more on the bets made by multiple super-investors simultaneously.

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We’d never suggest blindly following what any one person does. But it’s certainly worth exploring, for example, why eight top investors added JPMorgan Chase (symbol JPM) to existing holdings or established new positions in the third quarter of 2009. Or why five decreased or unloaded their holdings in Yahoo (YHOO).

We found six stocks that as of September 30 were owned by at least five of the investors SII tracks and that recently traded at more than 10% below their 52-week highs. They are Bank of America (BAC), Comcast (CMCSA), CVS Caremark (CVS), Goldman Sachs (GS), JPMorgan Chase and Monsanto (MON). Not surprisingly, each faces challenges. But some very smart investors, at least, believe they are surmountable.

For example, naysayers worry that Monsanto faces increasing pricing pressure in its core agricultural seed business and eroding profit margins in herbicides. But bulls see Monsanto’s dynamic research efforts leading to new products -- including corn and soybean seed formulations currently hitting the market -- that will benefit the company as growing prosperity around the world drives demand for the types of foods Monsanto’s seeds help create. Optimists see the company earning at least $7 per share by 2012. If they’re right, the stock, at $84 (as of December 4), doesn’t seem expensive.

Top investors have long favored Comcast, which should see a big increase in free cash flow now that it no longer has to spend massive amounts of capital on its cable systems. But the company remains dogged by longer-term concerns about Internet distribution of video content and, more recently, about its pending takeover of NBC Universal. At $16, the stock trades at only 13 times estimated 2010 earnings. Big-name managers apparently believe the potential gains make the risks worth shouldering.

One pick we don’t agree with is Bank of America. We think the prices of most bank stocks assume a recovery in the economy and credit quality that is stronger and more consistent than is likely given the still-dim prospects for consumer spending and residential and commercial real estate. With the ill-timed acquisitions of Countrywide Financial and Merrill Lynch still firmly around BofA’s neck, we’d steer well clear of its shares.

Funds co-managed by Whitney Tilson are short Bank of America.