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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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#4. The Coca-Cola Co (NYSE:KO)

 – Shares Owned by Value-Oriented Yacktman (as of December 31): 19.92 Million

 – Value of Yacktman’s Holding (as of December 31): $855.68 Million

 – Q1 Return: 8.8%

Mr. Yacktman and his team reduced their firm’s exposure to The Coca-Cola Co (NYSE:KO) by 4.97 million shares during the December quarter. The 19.92 million-share stake owned by Yacktman Asset Management was worth $855.68 million at year-end. The shares of the world’s largest beverage company have recently touched a new all-time high, after gaining 12% over the past 12 months despite Coca-Cola’s top-line results being on a decline for the past several years, mainly due to currency exchange headwinds. The company’s consolidated net operating revenue declined to $44.29 billion in 2015 from $46.00 billion in 2014 and $46.85 billion in 2013. The impact of foreign currency fluctuations contributed to decreasing the 2015 top-line figure by roughly 7%. Meanwhile, the owner of four of the world’s top five non-alcoholic sparkling beverage brands sold 29.2 billion units of its products (a unit case equals 24 eight-ounce servings) in 2015, up from 28.6 billion in 2014 and 28.2 billion in 2013. More importantly, analysts believe that Coca-Cola’s bottom-line growth will accelerate in the coming years as foreign currency headwinds are easing. There were 51 hedge funds tracked by Insider Monkey with long positions in the beverage company at the end of 2015, which had accumulated nearly 11% of its outstanding shares. Ray Carroll’s Breton Hill Capital upped its stake in Coca-Cola by 27% during the first quarter of 2016 to 11,695 shares.

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#3. Twenty-First Century Fox Inc. (NASDAQ:FOXA)

 – Shares Owned by Value-Oriented Yacktman (as of December 31): 38.67 Million

 – Value of Yacktman’s Holding (as of December 31): $1.05 Billion

 – Q1 Return: 3.2%

The Texas-based hedge fund owned 38.67 million shares of Twenty-First Century Fox Inc. (NASDAQ:FOXA) at the end of December, after cutting its stake in the company by 1.94 million shares during the quarter. The year-end stake was valued at $1.05 billion on December 31 and constituted almost 8% of Mr. Yacktman’s equity portfolio. The diversified global media and entertainment company’s revenue for the six months that ended December 31 was $13.45 billion, down from $15.94 billion reported for the same period of the prior year. The decrease mainly reflects the sale of the Direct Broadcast Satellite Television (DBS) businesses in November 2014. The DBS segment consisted of operations related to Sky Italia and Sky Deutschland AG. Excluding the DBS businesses, Twenty-First Century’s revenue for the six months that ended December 31 decreased by 3% year-over-year due to lower content revenue. The hedge fund sentiment towards Fox dropped in the fourth quarter of 2015 as the number of funds invested in the company decreased to 50 from 56 quarter-over-quarter. While it gained just 3.2% in the first quarter, a strong second quarter has pushed the stock to gains of almost 10% in value since the beginning of 2016. Jeffrey Ubben’s ValueAct Capital was the owner of 47.33 million shares of Twenty-First Century Fox Inc. (NASDAQ:FOXA) at the end of December.

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#2. PepsiCo Inc. (NYSE:PEP)

 – Shares Owned by Value-Oriented Yacktman (as of December 31): 14.36 Million

 – Value of Yacktman’s Holding (as of December 31): $1.44 Billion

 – Q1 Return: 3.3%

The value-oriented fund owned 3.44 million fewer shares of PepsiCo Inc. (NYSE:PEP) at the end of the fourth quarter than at the end of the third quarter. Yacktman Asset Management’s stake of 14.36 million shares held on December 31 was valued at $1.44 billion, and represented 10.9% of the fund’s equity portfolio. As with rival Coca-Cola, shares of PepsiCo are trading near all-time highs, after advancing by nearly 7% over the past 52 weeks. That prompted analysts at Stifel Nicolaus to downgrade the global food and beverage company to ‘Hold’ from ‘Buy’ recently, suggesting that the company is fairly valued at this point in time. Moreover, Stifel Nicolaus believes that there is a shortage of growth catalysts ahead for the company. Unlike Coca-Cola, which is a pure-play beverage company, PepsiCo is much more diversified thanks to its foods and snacks business. PepsiCo generated total net revenue of $63.06 billion in 2015, down from $66.68 billion in 2014. Similarly, net income decreased to $5.50 billion from $6.56 billion reported for 2014. PepsiCo’s shares currently change hands at 20.4-times expected earnings, slightly below the forward P/E multiple of 22.8 for the soft drinks industry. PepsiCo gained some popularity within the hedge fund industry during the December quarter, as the count of hedge funds bullish on the company climbed to 58 from 57 quarter-over-quarter. Boykin Curry’s Eagle Capital Management had 8.39 million shares of PepsiCo Inc. (NYSE:PEP) in its equity portfolio at the end of last year.

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#1. Procter & Gamble Co (NYSE:PG)

 – Shares Owned by Value-Oriented Yacktman (as of December 31): 21.86 Million

 – Value of Yacktman’s Holding (as of December 31): $1.74 Billion

 – Q1 Return: 4.6%

Procter & Gamble Co (NYSE:PG) is yet another classic value stock owned by Mr. Yacktman. Yacktman Asset Management reduced its stake in the popular company by 5.99 million shares during the October-to-December period, ending 2015 with 21.86 million shares valued at $1.74 billion. Procter & Gamble was the largest equity holding in the hedge fund’s portfolio at the end of 2015, accounting for 13.1% of the overall value of that portfolio. The shares of the owner of Tide and Ariel detergents, Fusion and Gillette blades and razors, and Pampers diapers are trading near their 52-week highs as well, after having gained 3% year-to-date. Procter & Gamble is a member of the exclusive list of Dividend Kings, as the company has increased its annual dividend payments for 60 consecutive years. The company currently distributes a quarterly dividend of $0.6695 per share, which equates to an annual dividend yield of 3.27%. Procter & Gamble’s Board recently increased its quarterly payment from $0.6629 per share, as a result of cash savings associated with the streamlining process of its products portfolio. The company’s net sales for the six months that ended December 31 decreased by 10% year-over-year to $33.44 billion due to an unfavorable mix of lower unit volume and foreign currency headwinds. In the meantime, the stock is priced at 20.3-times expected earnings, significantly below the forward P/E ratio of 27.5 for the personal products sector. The number of money managers in our database with stakes in PG declined to 52 from 58 during the October-to-December quarter. Warren Buffett of Berkshire Hathaway, another legendary value investor, owned 52.79 million shares of Procter & Gamble Co (NYSE:PG) at the end of December.

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Disclosure: None