In this article, we discussed the 10 Best Value Stocks to Buy for 2021 according to Tom Russo.
Value stocks underperformed compared to growth stocks over the past few years amid a stunning growth in technology and e-commerce companies. Still, some big names are sticking to their value investment stock-picking strategies. The famed value investor Thomas A. Russo is among them. Russo is the managing member of Gardner Russo & Gardner and he is one of the most famous value investors who like to hold stock for the long-term in order to generate gains from steady share price appreciation and dividends.
His investment philosophy is almost similar to legendary investor Warren Buffett. Russo says he decided to become a value investor after attending Warren Buffett’s guest lecture at Stanford Business School.
Warren Buffett of Berkshire Hathaway
Russo also learned from attending Berkshire Hathaway’s annual meetings and Buffett’s writings. He has also been holding a more than a billion-dollar stake in Buffett’s investment management firm Berkshire Hathaway (NYSE:BRK.A) and (NYSE: BRK.B) over the years. In a recent interview, he suggested new investors follow Warren Buffett’s footprints when picking stocks.
He seeks to generate returns through investments in companies that have a strong business model and extensive business structure to support sustainable growth in cash flows. Indeed, he has gone one step forward in a recent interview, saying the goal of investing is not to find companies that generate free cash flows but to find those that have the capacity to reinvest that free cash flow to expand the value of the enterprise in the future. Here is a statement he made in a presentation at Talks@Google.
“It is really the reinvestment of cash flow that in fact is free when it relates to the existing business, but which, if properly deployed, can expand the enterprise enormously. That is the skill you want to have attached to a cash-flow engine,”
Nestle SA (NSRGY) is the best example of Russo’s philosophy. The value investor said he favors Nestle over Kraft (NYSE: KRFT) because Nestle has actively expanded its business and brand recognition in both emerging and developed markets. On other hand, Kraft has only focused on its US business and requires a lot of cash to gain market share like Nestle does.
Russo is still following the old-fashioned investing style of buying stocks of large-caps at attractive valuations and then holding them for the long-term. Consequently, Russo doesn’t chase high growth stocks from information technology and consumer discretionary sectors. He has spread investments across only a few sectors including consumer staples, which accounted for 44% of the overall portfolio at the end of the fourth quarter. Stocks from the finance sector hold the second-largest weighting while the communications sector is Russo’s third most favorite area of investments.
Tom Russo also prefers to invest in family businesses:
“The benefit of investing in family-controlled enterprises is that the family can exert dominion over managements in a way that faceless public shareholders cannot. They have control and can influence the strategic direction. They have control, which allows them to guarantee managers that if they embark on the right investment programmes, they will not run the risk of being displaced from their jobs if midway through the investments, the cost of proper long-term-minded investments burdens short,”
Gardner Russo & Gardner’s 13F portfolio market value stood above $11 billion at the end of the fourth quarter, up from $10.2 billion in the previous quarter. The hedge fund has initiated a position in 8 stocks and added to its 22 existing positions. The firm sold out 3 stocks and reduced its positions in 47 stocks during the fourth quarter.
While Tom Russo’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 111 percentage points since March 2017 (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start our countdown on the 10 best value stocks to buy for 2021 according to Tom Russo. Gardner Russo & Gardner’s top ten positions account for 78% of the overall portfolio.
10. JPMorgan Chase (NYSE: JPM)
The value investing guru Tom Russo has been holding a big position in JPMorgan Chase (NYSE: JPM) over the past couple of years. Shares of JPM underperformed in 2020 but bounced back strongly by 12% so far in 2021– beating the broader market returns of just over 4%. In addition, Gardner Russo & Gardner has been collecting dividends from the bank. JPMorgan offers a dividend yield of 2.49% at present.
Jamie Dimon is a very smart insider to follow. We verified this back in 2012 when JPM shares declined from $45 to $33 because of the London Whale scandal (do you remember that?). Dimon bought 500,000 shares at around $34 per share. Insider Monkey maintains a 10-year database of insider filings and you can see Jamie Dimon’s entire insider transactions history on this page. The last time Dimon bought any shares of JPM prior to the 2012 purchases was in 2007. This indicated us that Dimon really thought JPM shares were significantly undervalued by the market. Given the fact that JPM shares currently trade above $148, Dimon made close to $60 million from those purchases. We believe Dimon is in a similar mood now. In December JP Morgan announced a $30 billion share repurchase program for 2021. JPM shares are already up 25+% since that announcement. We think JPM will continue to outperform the market and see above $160 in 2021.
In a Q2 investor’s letter, VLTAVA Fund has also claimed that the dip in JPM’s share price offered an attractive buying opportunity. Here is what VLTAVA Fund stated:
“In the quarter just ended, we bought shares of JP Morgan. In our opinion, among all the world’s large banks, this one is the best managed and financially strongest. It did very well already in the recession of 2008, when it remained profitable and did not require government help.”
9. Compagnie Financière Richemont SA (OTCMKTS: CFRHF)
Tom Russo has significantly increased its stake by 186% in Compagnie Financière Richemont SA (CFRHF) during the fourth quarter. It is the ninth-largest stock holding of Gardner Russo & Gardner’s 13F portfolio valued at $638 million. The firm first initiated a position in Compagnie Financière during the first quarter of 2011. Shares of Compagnie Financière Richemont rallied close to 30% in the last twelve months. The company also offers a small dividend to investors.
8. The Unilever Group (NYSE: UL)
The firm initiated a brand new position in The Unilever Group (NYSE: UL) during the fourth quarter, accounting for 6.11% of the overall portfolio. Unilever’s stock price underperformed in the last twelve months but the company continues paying hefty dividends to shareholders, with dividend yield currently standing around 2.50%.
Lindsell Train, an investment management firm, stated in a fourth-quarter investor’s letter that Unilever has the potential to remain relevant even in the changing market trends. Here is what Lindsell Train stated:
“One of the biggest holdings here includes Unilever. The way consumers have flocked to such brands in 2020, perhaps for reassurance, has been reassuring for the investors.
In Unilever’s most recent quarterly results the company reported its e-commerce revenues were up 76% year-on-year, up to 10% of the total. This does not mean that Unilever is turning into an Internet business, but it does give reassurance that its brands – from Ben & Jerry’s to Domestos – can remain relevant in an increasingly digital world. By the way – have you tried Unilever’s new Marmite-infused peanut butter? It’s divine.”
7. Philip Morris International Inc. (NYSE: PM)
The firm has been holding a position in Philip Morris International Inc. (NYSE: PM) since 2008 and it currently represents 6.31% of the overall 13F portfolio, according to the fourth quarter filings. Shares of Philip Morris International underperformed in the last five years. Despite that, the company extended its dividend growth policy. Its dividend yield is hovering around 5.5% at present.
First Eagle Investment Management, which posted returns of 14.73% from Global Fund A Shares for the second quarter, strongly believes in PM’s pricing power, cost discipline, and robust balance sheet. Here is what First Eagle Investment Management stated in the Q2 investor’s letter:
“Philip Morris was able to recover some of the ground lost during the first quarter selloff but remains well below its early-year highs. Tobacco industry volumes were hurt by Covid-19, as lockdowns and other social-distancing restrictions in certain key markets hurt demand. Duty-free sales also suffered given the lack of global travel during the period. Given its pricing power, cost discipline and robust balance sheet, we believe Philip Morris appears well positioned to navigate the ongoing transition from traditional combustible tobacco products to “heat not burn” alternatives.”
6. Pernod Ricard SA (OTCMKTS: PDRDF)
Although Tom Russo declined its stake by 8% in Pernod Ricard SA (PDRDF) during the fourth quarter, the stock holding still accounts for 6.76% of the overall portfolio and represents the sixth-largest stock holding of Gardner Russo & Gardner portfolio. The hedge fund has been holding a stake in Pernod Ricard since 2011 and it appears that the firm is benefiting from its position. This is because shares of Pernod Ricard rallied close to 115% in the last ten years and the company has increased its dividend from $1 per share in 2011 to $3.4 per share at present.
5. Heineken Holding N.V. (OTCMKTS: HKHHF)
Tom Russo is bullish on Heineken Holding N.V. (HKHHF) over the last decade. It is the fifth-largest stock holding of Gardner Russo & Gardner’s portfolio. Although Heineken shares underperformed in 2020, its stock price is still up 100% in the last ten years. Heineken offers a dividend yield just below 1%. Heineken Holding N.V., through its subsidiaries, brews and sells beer and cider. The company has generated $23 billion euros in December quarter revenue.
It is clear that Tom Russo believes multinational European mega-cap consumer products companies present safe, long-term investment opportunities. These stocks won’t double your money in a year or deliver 10x gains in 5 years, but they will probably produce low double digit annual gains over the past 5 years without taking a bunch of risk.
4. Alphabet Inc (NASDAQ: GOOG)
The hedge fund held a position in Alphabet since 2014 and it appears that Tom Russo’s stock-picking strategy worked for the hedge fund. This is because shares of Alphabet rallied 200% in the last five years. It is the fourth largest stock holding of Gardner Russo & Gardner’s portfolio.
Kinsman Oak Capital Partners Inc., which generated a return of 6.4% for the fourth quarter, highlighted few stocks including Alphabet in the Q4 investor’s letter. Here’s what Kinsman Oak Capital Partners said:
“Our view on Alphabet (GOOG) may be somewhat controversial. The bear case for GOOG boils down to antitrust risk and valuation. Our thesis is predicated on the belief that real earnings power, especially for Alphabet, is higher than it appears on the surface. At first glance, Alphabet’s P/E appears to be 30.2x. Adjusting for net cash brings this down to 27.9x. Alphabet’s “Other Bets” segment generates de minimis revenues but reduces operating income by 13%. Adjusting for that (and assigning zero value to a segment that includes Waymo, Nest, and Verily) brings the multiple to 24.7x versus the S&P 500 trading at 22.3x.”
3. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)
Tom Russo looks bullish over Berkshire Hathaway’s (NYSE: BRK.A) (NYSE: BRK.B) performance over the last two decades. The hedge fund has been holding big positions in both class A and B shares. The firm held 3419 shares of BRK.A and almost 2 million shares of BRK.B at the end of the fourth quarter. Both positions generated strong share price gains in the last two decades.
In the Q2 investor’s letter, Nomadic Value Investment Partners highlighted the confidence in Berkshire Hathaway. Here is what Nomadic Value Investment Partners stated:
“We added to Berkshire Hathaway. I won’t spend too much talking about this, but BRK is as attractively priced as it’s been in some time. The press’s and FinTwit’s fascination with “Warren’s lost it” is at a cyclical peak and is complete noise. However, the valid bear argument is that BRK is too big to compound at good rates going forward, and subsidiary company performance will be weak for the next couple of years with its high exposure to air traffic (Precision Cast Parts and previously held airline stocks) and holdings in “old economy” manufacturing and retail businesses. Also, short-term there’s an unknown consequence of insurance claim payouts and/or refunds13 . We wouldn’t completely disagree with these judgments, and the optics are certainly bad when BRK doesn’t buy back shares in a quarter with a substantial sell-down. However, with a long-term lens and given the management style of BRK (conservative talk and overperform), we will likely be quite satisfied in the future – whatever that looks like. Meanwhile, we’ve gotten into a range where 30%-50% of BRK is free. Are the actual growth prospects for Berkshire this dire? Berkshire is our largest position.”
2. Nestlé S.A. (OTCMKTS: NSRGY)
Nestle S.A. (NSRGY) is one of the best value investments in Tom Russo’s view. Gardner Russo & Gardner first initiated a position in Nestlé S.A. in 2011 and it currently represents the second largest stock holding of its 13F portfolio. The share price of Nestle rose 101% in the last ten years. On the other hand, the dividend factor makes Nestle an attractive stock to hold for the long-term investor. The company currently offers a dividend yield of 2.5%.
1. Mastercard Incorporated (NYSE: MA)
Gardner Russo & Gardner initiated a position in Mastercard Incorporated (NYSE: MA) in 2008 and it is the largest stock holding based on Q4 filings, accounting for 14% of the overall 13F portfolio. Despite underperformance in the last twelve months, shares of Mastercard grew 1250% in the last ten years. The payment technology company raised dividends in the last ten successive years.
In the Q3 investor’s letter, Del Principe O’Brien Financial Advisors highlighted few stocks including Mastercard Incorporated. Here is what Del Principe O’Brien Financial Advisors stated:
“The market pullback in the spring gave us a chance to become owners of Mastercard, one of the biggest players in the global payments industry. In the fiscal year 2019, the company processed almost $5 trillion in purchase transactions and holds 29% of the global market share for credit cards and 24% of the global market for debit cards.
In June, Mastercard entered into an agreement to acquire Finicity, a financial data and insight provider, for a purchase price of $825 million. The move is meant to strengthen Mastercard’s existing open banking platform. Open banking is a system that gives third parties, including other banks and tech start-ups that provide financial services (think budgeting apps), digital access to financial data. A user-focused innovation in the banking industry, open banking is thought to be the future of banking. We see an active investment in its open banking platform as a good move for Mastercard toward maintaining its leadership in the global market.”
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