Hedge Fund Manager John Levin’s Top Stock Picks: Microsoft, Merck, JP Morgan

Microsoft Corporation (NASDAQ:MSFT), Merck & Co Inc (NYSE:MRK), and JP Morgan Chase (NYSE:JPM) are among John Levin’s top stock picks. Founded in 2005 and based in New York City, Levin Capital Strategies typically invests in large cap stocks which it identifies using fundamental analysis to develop a bottom-up perspective on a company’s value. John Levin, the portfolio manager at Levin Capital Strategies, previously ran Levin Management Company and served as the President of BKF Capital Group. Levin Capital Strategies filed its 13F with the SEC last month, disclosing a number of its long equity positions as of the end of the second quarter. Read on to learn more about the fund’s five largest holdings or see our listing of all its disclosed stocks.

Levin owned 3.9 million shares of Merck & Co., Inc. (NYSE:MRK) at the end of June. Posting a market capitalization of nearly $140 billion, Merck offers a wide range of medications for people and animals. It’s a very good choice for a defensive investor: the stock’s beta is 0.4 and at current prices the dividend yield is 3.8%. From a value perspective Merck is a bit more questionable with a trailing price-to-earnings multiple of 21 and an 11% decline in income last quarter compared to the same period a year earlier. Point State Capital, managed by Sean Cullinan and several former members of Stanley Druckenmiller’s Duquesne Capital, initiated a position in Merck during the second quarter.

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Microsoft Corporation (NASDAQ:MSFT) was another of the fund’s top picks as it reported a position of 5.4 million shares. Sell-side analysts expect bumps in earnings per share in both this fiscal year (ending in June 2013) and next fiscal year for Microsoft, with a 2-year average EPS growth rate of 21%, as the company releases new versions of Windows and Office. Their consensus implies a forward P/E multiple of only 9; however, we’re not sure how sustainable this higher level of earnings would be. Microsoft is about even with the market over the last year despite a slew of product announcements.

The fund owned 3.1 million shares of JPMorgan Chase & Co. (NYSE:JPM), which is up 14% this quarter as it recovers from the London Whale losses and some hopeful signs have come out of Europe. JPMorgan Chase still trades at only 9 times trailing earnings, 8 times forward earnings estimates, and a P/B ratio of 0.9, so investors may still consider it a good value. The 2.9% dividend yield on the stock is beneficial as well. However, JPMorgan Chase is experiencing many of the same constricting pressures as the rest of the banking industry and its revenue and earnings both fell in its most recent quarter versus a year ago.

Pfizer Inc. (NYSE:PFE) was another large-cap stock that Levin liked as it closed June with 4.8 million shares in its portfolio. Pfizer has a lot in common with Merck, as can be imagined: its dividend yield is 3.6% and its beta of 0.7 leaves it fairly well protected from a bear market. Pfizer is also larger than Merck at a $183 billion market cap, and actually increased its earnings last quarter compared to the same period in 2011. It is also cheaper, at a trailing P/E of 18 and a forward P/E of only 11. Pfizer, JPMorgan Chase, and Microsoft all made our list of the ten most popular stocks among hedge funds for the second quarter.

Levin Capital increased its stake in Ralcorp Holdings Inc. (NYSE:RAH) by 13% to a total of 1.6 million shares, putting the $4 billion packaged food company in the top five alongside the better-known megacaps we’ve mentioned. Ralcorp owns brands such as Post and Honey Bunches of Oats. It has disappointed the Street each of the last four quarters, and its forward P/E of 19 is not particularly low given its industry. The stock has fallen over the last year, while the S&P 500 is up 29%.

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