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Edinburgh Partners’ Top Stock Picks

Edinburgh Partners is a global, long-term, absolute-return manager. Its investment team generally analyzes companies over a five-year period as opposed to what it dismisses as the short-term focus of other investors. Dr. Sandy Nairn, the investing partner and one of the founders of the firm, previously served as Chief Investment Officer of Scottish Widows Investment Partnership and has also written a book on the history of investing in technology. We have gone through the fund’s 13F filing for the end of June (in which it discloses many of its long equity positions). See our full list of Edinburgh’s favorite stocks or read on for a quick take on its five largest holdings.

Sandy Nairn

Edinburgh’s top pick was a popular stock among hedge funds- the third most popular to be precise (see our ranking of the ten most popular stocks among hedge funds for the second quarter). The fund reported a position of 8.6 million shares in Microsoft Corporation (NASDAQ:MSFT). Microsoft plans to take the tablet fight directly to Apple and Google with its new Surface offering, and the company is coming up on its equivalent of Christmas as new versions of Windows and Office are released to consumers and businesses. It is expected to earn about $3 per share in this fiscal year (ending in June 2013), yielding a current-year P/E of 10; however, we think some of those earnings will be artificially higher thanks to the Windows/Office release.

Nairn and his team had 14.2 million shares of Cisco Systems, Inc. (NASDAQ:CSCO) in the fund’s portfolio. The networking company now offers a 3% dividend yield and is also a value candidate: its trailing and forward P/Es are 13 and 9, respectively. Cisco also delivered substantial earnings growth in its most recent quarter compared to a year ago, with a small rise in earnings being magnified by considerably higher margins. Billionaire Ken Fisher’s Fisher Asset Management added shares to its own portfolio and owned over 21 million shares at the end of June.

The fund had owned a small position in Wal-Mart Stores, Inc. (NYSE:WMT) at the end of March, and dramatically increased that stake over the course of the second quarter to a total of 3.4 million shares. Wal-Mart doesn’t quite have the same growth opportunities as a pure tech company, but its 5% rise in revenue and 6% increase in earnings in its most recent quarter versus the same period in 2011 are respectable nonetheless for the $250 billion market cap retailer. Wal-Mart, as one can imagine, has little exposure to the broader market at a beta of 0.4 and could prove a decent value at 16 times trailing earnings.

The odd one out among all these well-trafficked names is Edinburgh’s 4.2 million shares of the slightly less household name of Illinois Tool Works Inc. (NYSE:ITW), which was down from the previous quarter but still placed it among the fund’s top holdings. The $28 billion industrial equipment and machinery company is up 35% over the last year, and reported sharply higher earnings in Q2 than a year ago. The stock pays a 2.5% dividend yield and trades at earnings multiples in the 12-13 range. It has considerable exposure to the broader economy but has about as much claim to value status as some of these other stocks.

Google Inc (NASDAQ:GOOG) was the fifth largest position in Edinburgh’s 13F portfolio and the largest new holding. The fund owned about 370,000 shares of the technology company which is dominant in search, a market leader in smartphone infrastructure, and attempting to chip away at Apple’s lead in the tablet space. A fury of buying at Google has sent its stock price up 29% this quarter, yet it still only trades at a forward P/E of 15. It continues to grow nicely, reporting double-digit rises in revenue and earnings in the second quarter of 2012 versus the same quarter last year.

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