One of the best ways to find good investment ideas is to study the holdings of successful money managers. I do it all the time. These men and women are paid handsomely to find the best stocks possible. It would be silly not to ride their coattails once in awhile. Another less obvious method for finding stocks is to examine the holdings of student-run, university-endowed undergraduate and graduate investment funds. Forward-thinking universities are slicing off a small piece of their endowment funds so that business students can learn the ropes while working with real funds. There is no better way to educate future investment professionals than by giving them a dose of reality. Today, I'll look at the top five holdings of the Mizzou Investment Fund at the University of Missouri Business School. This past fall, students produced reports on each of its holdings with recommendations for the future. I'll examine their findings.
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Top Five Holdings By Dollar Amount - Mizzou Investment Fund
|Philip Morris International (NYSE: PM)||15.9%|
|Transocean (NYSE: RIG)||75.2%|
|Procter & Gamble (NYSE: PG)||0.9%|
|Flowserve (NYSE: FLS)||85.7%|
|Microsoft (Nasdaq: MSFT)||59.5%|
The Mizzou Investment Fund's website doesn't provide a lot of information about its performance, so I will assume that all five stocks were held for the entire year. If so, at least based on its top five holdings, the fund likely had a strong year in 2009. Hopefully I can get those numbers in the future. In the meantime, I'll highlight the students' observations about each of these holdings.
Philip Morris International
Student analyst Andrea Gill gave the tobacco company an intrinsic value of $52.40 back in September 2009 based on its discounted cash flow. Her recommendation was to sell some of its holdings because better growth opportunities were available involving less government regulation and industry competition. If current holdings are accurate, the fund did not sell any shares despite the recommendation. Its shares are down only slightly since then, so perhaps they've decided to hold into the 50s.
In October, Mizzou's student analyst covering Transocean's stock gave it an intrinsic value of $84.51, recommending that the fund continue to hold Transocean as its shares were undervalued based on future earnings from a $40 billion contract backlog. I couldn't agree more. With a free cash flow yield over 10% and its enterprise value just six times EBITDA, Goldman Sachs' (NYSE: GS) $111 price target seems more than reasonable. Good call, Tigers!
Procter & Gamble
The analyst gave P&G an intrinsic value of $68.79 with a hold recommendation. Using SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), the positives the students found about the giant packaged goods company include its laundry list of brands as well as its vital presence in the growing economies of Russia, China and India. In terms of downside, they felt P&G's inability to raise prices much given the intense competition, along with its reliance on Wal-Mart (NYSE: WMT) for 15% of its overall sales, means it's boxed in to a certain extent, unable to write its own ticket. Despite these lingering doubts, P&G stock is up more than 10% since the analysis was done in September. Very little has changed in the meantime, so I'd think at this point they would be reluctant to sell until its stock price is closer to its true value.
As its name suggests, Flowserve sells flow control products to the oil industry among others. The Mizzou brain trust pegs its intrinsic value at $94.51. The student analyst who wrote up this report believes the fund should hold the stock with a look to possibly buy more in the future. However, he does mention proceeding with care as its stock is quite volatile. You better believe it is. Flowserve announced January 29 that its earnings per share would be at least $7.20-$7.50 and quite possibly more due to 90 cents a share in realignment charges. At the low end of the range, we're talking about a 12.5 price-to-earnings ratio with margins higher than the competition. The upside looks good.
For the last of the fund's largest five holdings, Microsoft, the fund's analyst arrived at an intrinsic value of $25.95 back in October. That's where it was trading at the time. Three months later, it sits around the $28 mark, up almost 10%. Once again, the analyst responsible for the report gave a "Hold" recommendation on its stock, the fourth in five tries. Normally I'd be critical of sitting on the fence, but in this instance, it's a good decision because the market came a long way in 2009 and is bound to correct some.
Do yourself a favor and get to sites like the one hosted by the University of Missouri. The analysis is pretty standard stuff, but the fact that the students do it for each and every holding is impressive. Part of investing successfully is putting together a plan and sticking to it. The students at Mizzou prove it can be done with some successful results to boot. Good for them. (We take a close look at the main principles the "Oracle of Omaha" uses in assessing a company. For more information, read What Is Warren Buffett's Investing Style? and Warren Buffett: How He Does It.)
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