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Value Investing Guru Donald Yacktman Propelled to Strong Q1 by Top Picks

Some analysts and investors believe that value investing will achieve a comeback in the foreseeable future, as growth stocks have outperformed value stocks by a wide margin in the past several years. According to analysts at BMO Capital Markets, value plays outperformed growth stocks by 3.2% per annum since 1975 in periods when earnings growth was gaining steam. However, growth stocks have beaten value plays by 3.1% annually when earnings were sliding. Billionaire Donald Yacktman, one of the most well-known value-oriented investors in the industry, founded Yacktman Asset Management in 1992 after serving as portfolio manager of the Selected American Shares Mutual Fund for approximately ten years. Mr. Yacktman, named portfolio manager of the year by Morningstar in 1991, looks for three attributes when analyzing possible investments. First of all, a company needs to have strong, profitable businesses that do not require too much money to run. Secondly, the company’s management should be focused on increasing its bottom-line figures and enhancing shareholder value. Lastly, a suitable investment candidate should trade at a huge discount to Mr. Yacktman’s estimate of its ‘true’ market value. According to our calculations, the value investor’s 39 long positions in companies with a market capitalization above $1 billion posted a weighted average return of 5.2% in the first quarter of 2016, based on the size of those positions at the end of 2015. This suggests that Mr. Yacktman’s value plays have started to bear fruit, beating broader market benchmarks and peers by a wide margin. It should be noted that the Texas-based value-oriented investment firm significantly reduced its exposure to U.S equities in the final quarter of 2015. With that in mind, Insider Monkey decided to analyze the performance of Yacktman Asset Management’s top five positions during the first quarter of this year.

At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5. SYSCO Corporation (NYSE:SYY)

 – Shares Owned by Value-Oriented Yacktman (as of December 31): 20.57 Million

 – Value of Yacktman’s Holding (as of December 31): $843.41 Million

 – Q1 Return: 15.6%

Yacktman Asset Management trimmed its position in SYSCO Corporation (NYSE:SYY) by 5.24 million shares during the final quarter of 2015, ending the year with 20.57 million shares. The stake was valued at $843.41 million at the end of December and accounted for 6.39% of the fund’s equity portfolio. The foodservice supplier boasts a dividend yield of 2.66%, as it pays out an annual dividend of $1.24 per share. However, some analysts raised questions about the company’s ability to keep raising its annual dividend payment, saying that SYSCO has failed to impress investors with its bottom-line results in recent years. The company paid $348.4 million in dividends during the first half of fiscal year 2016 that ended December 26, while net earnings for the same period reached $516.82 million. Therefore, the payout ratio of approximately 66% should not raise any red flags among investors. SYSCO Corporation recently announced the increase of a previously-announced operating income growth target of $400 million to more than $500 million, which is anticipated to be reached by the end of fiscal year 2018. The food distributor has increased its annual dividend payments for 45 consecutive years and appears to be well-positioned to keep increasing those payments in the coming years. Nonetheless, the smart money sentiment towards SYSCO declined notably in the December quarter, with the number of money managers invested in the company shrinking to 22 from 30 quarter-over-quarter. Nelson Peltz’s Trian Partners owns 42.69 million shares of SYSCO Corporation (NYSE:SYY) as of the end of the fourth quarter.

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