We track hundreds of hedge funds’ quarterly 13F filings as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). We also like to analyze individual filings to search for any trends in how top managers are playing the markets, and potentially identify investment ideas for further research. When we looked through billionaire David Harding’s Winton Capital Management’s 13F, we saw a number of consumer goods stocks among the fund’s largest holdings. Read on for our quick take on Winton’s five largest consumers goods positions or see the full list of the fund’s stock picks.
Harding and his team’s largest holding by market value was their more than 590,000 shares of Kimberly Clark Corp (NYSE:KMB). The personal products company looks like an ideal defensive stock: its beta is essentially zero, reflecting no relationship to the broader economy, and its dividend yield is 3.3% at current prices. With a market cap of $38 billion, Kimberly-Clark is certainly well capitalized as well. We’d note that at this valuation the stock is priced for future growth, with trailing and forward earnings multiples of 21 and 16 respectively.
Spices and seasonings manufacturer McCormick & Company, Incorporated (NYSE:MKC) was another of Winton’s top picks with the filing disclosing ownership of over 670,000 shares. McCormick’s yield isn’t particularly high but it also stands out for a fairly low beta, at 0.4. While growth of both revenue and net income was quite modest in its most recent quarterly report (for the quarter ending in February) compared to the same period in the previous fiscal year, the valuation is fairly aggressive here with McCormick valued at a trailing P/E of 24. As a result we would avoid the stock.
The fund increased the size of its position in Colgate-Palmolive Company (NYSE:CL) by 72% to a total of about 340,000 shares. Colgate-Palmolive is another stock where markets are expecting earnings per share to increase considerably going forward, and even with Wall Street analysts calling for some improvements this year and next year the forward earnings multiple is 19. The company’s earnings have actually been down, going by recent reports, though it does fall in line with the other two stocks we’ve discussed here in terms of having a low beta (of 0.2).
According to the 13F, Harding had around 540,000 shares of Brown-Forman Corporation (NYSE:BF.B) in his portfolio as of the beginning of April. The alcoholic beverage company, whose brands include Jack Daniels and Southern Comfort, experienced a 10% increase in revenue in its fiscal Q4 (which ended in April) versus a year earlier, with earnings rising 8% over the same time frame. The stock trades at 25 times trailing earnings, which again seems to be a high valuation even as Brown-Forman has at least been delivering good financial results.
Winton owned 1.1 million shares of cigarette company Altria Group Inc (NYSE:MO), a 29% increase from the beginning of 2013. As with many cigarette stocks, Altria Group Inc (NYSE:MO) pays a high dividend yield (close to 5% at current prices) and has a low beta (of 0.4). While net income was up strongly last quarter compared to the first quarter of 2012, revenue numbers were about flat. The trailing P/E of 16 represents a discount to these other companies we’ve mentioned, but still incorporates expectations of at least some future EPS growth. Renaissance Technologies, founded by billionaire Jim Simons, reported a position of 1.7 million shares in its own 13F (find Renaissance’s favorite stocks).
Most of the consumer goods picks we’ve discussed here look expensive to us. It appears that Winton is interested in these stocks as a broad investment theme for the downside protection which they offer to a portfolio- we can see that each of these names carries a beta of less than 0.5. In that sense, the wealth of consumer goods stocks even at their high valuations is likely not an indicator that Harding is looking for high growth in the sector but instead the result of somewhat bearish sentiment. While many of these stocks aren’t appealing on a value basis, Altria Group Inc (NYSE:MO) as well as other cigarette companies may be worth considering for income investors.
Disclosure: I own no shares of any stocks mentioned in this article.