Diamond Hill Capital’s Top Stock Picks

Diamond Hill Capital, managed by Ric Dillon, has filed its 13F with the SEC for the third quarter of 2012. This filing discloses many of the fund’s long equity positions from the end of September, and allows investors to see what large funds consider to be good stock picks. Over the next few weeks more funds, including well-known funds managed by billionaire investors, will release their own filings Read on for our quick take on the five largest positions reported on Diamond Hill’s 13F or compare them to previous filings.

The largest position in Diamond Hill’s 13F portfolio by market value was its 3.5 million shares of Occidental Petroleum Corporation (NYSE:OXY). This was about even with what the fund had owned at the beginning of July. At a market capitalization of $68 billion, Occidental (which is an integrated oil & gas company operating worldwide) is currently priced at 11 times earnings on both a trailing and a forward basis. It was one of the ten energy stocks hedge funds were crazy about during the second quarter. Even though its business was down last quarter from a year earlier, it could be a value play.

The fund sold some of its shares of EOG Resources, Inc. (NYSE:EOG), with the number of shares in its portfolio falling from 2.4 million to 2.3 million, but increases in the oil and gas exploration and production company’s stock price brought into Diamond Hill’s top five holdings. Dillon and his team had increased its holdings by 48% during the second quarter, but started to sell shares. EOG currently has a market capitalization of slightly more than $30 billion and trades at 22 times trailing earnings. In the second quarter, its revenue increased 18% and its earnings were up 34% from the second quarter of 2011.

Dan Loeb THIRD POINT

United Technologies Corporation (NYSE:UTX) was another of Diamond Hill’s favorite stocks. The fund owned 3.2 million shares of the conglomerate, which provides a number of products including Otis elevators and aerospace products under brands such as Sikorsky as well as Pratt and Whitney. This was roughly even with what Diamond Hill had owned at the start of the quarter. Billionaire Dan Loeb’s Third Point sold shares in the second quarter, but the company was still one of the fund’s top five holdings according to its 13F. See more of Dan Loeb's favorite stocks. United Technologies trades at trailing and forward P/Es of 16 and 13, respectively.

Diamond Hill sold a small number of shares of Abbott Laboratories (NYSE:ABT) during the third quarter, bringing the number of shares in its portfolio down to 3.6 million from 3.7 million three months earlier. Abbott, a drug manufacturer (including of generic drugs), trades at a trailing P/E of only 16 despite very good growth numbers. Wall Street analysts expect its growth to continue in 2013, and so the company’s forward P/E multiple based on consensus estimates is 12. It also pays a 3.0% dividend yield.

Dillon and his team also sold part of their position in $43 billion market cap medical device company Medtronic, Inc. (NYSE:MDT). Diamond Hill owned 5.8 million shares at the end of the second quarter, and 5.6 million shares at the beginning of this month. Medtronic is another company which looks like a good value from a quantitative perspective as it trades at 12 times trailing earnings and 11 times forward earnings estimates. It experienced modest growth in both revenue and earnings in its most r3ecent quarter compared to the same period in the previous year.

There were no major changes at the top of Diamond Hill’s portfolio during the third quarter. The fund did make some small sales, but overall remained committed to investing in oil and gas companies and in healthcare companies trading at cheap multiples. We think that Occidental, as well as Abbott and Medtronic, would be good stocks to investigate further and make sure that they can at least sustain their businesses over the next few years.

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