6 Stock Picks from a Master

Don Yacktman's funds take big stakes in large, solid companies -- and the results have been eye-popping.

At the tender age of 70, Don Yacktman, like octogenarian Warren Buffett, shows no signs of losing his touch. If anything, he keeps getting better. Yacktman makes investing look easy.

Consider a few numbers. Over the past ten years through July 10, Yacktman Fund (symbol YACKX (opens in new tab)) returned an annualized 11.2%, nearly double the return of Standard & Poor’s 500-stock index. It ranks in the top 1% among funds that invest in large companies with a blend of growth and value attributes. (All returns in this story are through July 10.)

The fund produced those returns while taking less risk than most of its rivals. It has been about 20% less volatile than the S&P 500. When the S&P plunged 55.3% in the 2007-2009 bear market, Yacktman lost 46.5%

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How has the fund done it? Says Don Yacktman: “Our sweet spot is out-of-favor, large businesses.” He picks up the stocks when they’re cheap, then waits patiently for them to come back into favor. The fund holds stocks for five to ten years, on average. (Yacktman runs the fund with his son Stephen and Jason Subotky; the San Antonio-based trio also manage Yacktman Focused -- (YAFFX (opens in new tab)) -- a more concentrated version of Yacktman.)

Procter & Gamble (PG (opens in new tab)) is a classic Yacktman pick. Over the past year, the stock has produced a total return of -1.6%. The maker of household and beauty products has suffered from anemic growth along with the moribund global economy. In the worst of the downturn, many customers switched to cheaper store brands, and some haven’t switched back.

But at the July 10 close of $61.73, the stock yields 3.6% and trades at 13 times analysts’ earnings forecasts for the coming 12 months. Yacktman believes P&G will generate long-term profit growth of 10% to 11% annually.

Yacktman looks at the investment landscape today and sees astonishingly good value in one area: high-quality stocks. “In 44 years in this business,” he says, “I’ve never seen solid businesses like Procter & Gamble this cheap on a relative basis.”

Here are five more of Don Yacktman’s picks:

C.R. Bard (BCR (opens in new tab)) makes a variety of medical devices, including stents, catheters and diagnostic equipment. Yacktman says many of its products are better than those of its rivals, allowing Bard to charge higher prices. “Bard keeps improving its products,” he says. The stock, at $105.68, trades at 13 times the average analysts’ earnings estimates for the coming 12 months.

Shares of Cisco Systems (CSCO (opens in new tab)) have performed miserably since the tech bubble burst in 2000. Some of its long-dominant Internet switches face real competition. But its market share in switches remains relatively stable, and the demand for its networking equipment continues to grow. Meanwhile, the stock is dirt-cheap. At $16.41, it trades at just 9 times estimated earnings.

Microsoft (MSFT (opens in new tab)), another “old tech” behemoth, has made countless mistakes in recent years. For instance, Yacktman, like many investors, thinks the company grossly overpaid for Skype. “We didn’t buy Microsoft because of its management,” he says. “We bought it in spite of it.” Office, Windows and Xbox continue to generate big profits. At $29.74, the stock trades at just 9 times forecasted earnings and yields 2.7%.

PepsiCo (PEP (opens in new tab)) is known for soft drinks, but its snack foods are even more profitable. It’s the world’s largest snack food company, controlling 40% of the market for salty snacks. If consumers demand healthier snacks, Yacktman says, Pepsi will adapt. “It has such an incredible distribution and marketing system.” The stock, at $69.87, trades at 15 times earnings forecasts and yields 3.1%.

The other Sysco (SYY (opens in new tab)) is the world’s largest food service distributor, supplying a cornucopia of items, from steaks to kitchen equipment, to restaurants. Sysco’s size -- it generates 17% of the industry’s sales -- gives it tremendous cost advantages over competitors. The stock, at $29.21, trades at 14 times estimated profits and yields 3.7%.

The Yacktman shop lacks the deep team of analysts found at many competitors. But Yacktman Fund holds only 43 stocks, so the group can get away with fewer analysts than, say, a money manager that owns hundreds of stocks. Yacktman Focused is even more concentrated, holding just 38 stocks at last report.

Yacktman Fund -- my favorite of the two because it’s a bit less concentrated -- has 36% in consumer staples, 17% each in consumer cyclicals and health care, and 16% in technology. The fund also has 12% in cash. That strikes me as a good mix for an uncertain economy. Annual expenses are 0.80%.

I’ll admit it: After interviewing Don Yacktman many times over the years, I still don’t know how he does it. His returns and low volatility speak for themselves, but I’d feel more comfortable if I had a better understanding of how he produces such sterling results.

Yacktman recently sold his firm, Yacktman Asset Management, to Affiliated Managers Group. But the three co-managers signed ten-year employment agreements, and they retain full control over investing. So the sale doesn’t worry me. But I’d be quite concerned if Don Yacktman hung up his spurs, which he says he has no plans to do. “This is my hobby,” he says.

Another caveat: This fund won’t keep up in bull markets. It earns its spurs in flat and down markets. When economically sensitive stocks rally, Yacktman funds will lag. For this dicey market, though, the fund looks solid.

Steven T. Goldberg (opens in new tab) is an investment adviser in the Washington, D.C. area. He and one of his clients own shares of Cisco Systems; one of his clients owns shares of Procter & Gamble.

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Steven Goldberg
Contributing Columnist, Kiplinger.com
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.