Top stock picks from top pros
They racked up some of the best fund returns of the Lost Decade by sticking with this simple strategy: Buy quality. Here's where they see opportunity now.
His picks: PepsiCo, Coca-Cola, News Corp.
"The market doesn't appreciate how good Pepsi and Coke are," says Yacktman, who has been the fund manager for 28 years.
"Coke's stock price peaked in 1998, Pepsi's in 2008, and since those dates both drifted down as the companies' earnings and dividends rose. But Pepsi has great brands in its soft drinks and Frito-Lay snacks. And Coke is growing strongly overseas.
"News Corp. is a hidden gem. Fox News represents a voice most of the media has left out, giving it huge market share. And while most investors are concerned about ad sales, more and more of News Corp.'s revenue is from fees paid by cable users to access the Fox channels. So the volatility of the revenue stream is being reduced."
His strategy: To identify bargains, Yacktman looks at both the growth rate of a company's free cash flow (the dough generated after expenses and capital investments) and the quality of its management, set against its stock price.
The 69-year-old compares his method with that of a traditional bond buyer: "We ask what the compound rate of return will be if we hold the stock awhile."
Sometimes this long view means making contrarian bets. In the late 1990s, as big tech stocks soared, Yacktman loaded up on shares of small non-IT companies, which he argued were wildly underpriced.
Investors balked, but when the tech bubble burst, the fund enjoyed double-digit gains.
Yacktman also practices patience, often holding a considerable amount of cash while waiting for better deals.
Where he sees opportunity: "A lot of the cyclical stuff that's tied to the economy -- like the auto, chemical, and metal businesses -- has done well as the market has anticipated a recovery," he says.
"As a result, defensive plays, like Coke and Pepsi, have been left behind. There are times when the best thing to buy are boring-but-solid blue chips; this is one of them.
"Lots of large companies with above-average profitability are selling at below-average prices. These stocks will protect you if things get worse and still reward you if things get better. I've seen few periods over the past 40 years with so much opportunity."
So while he had as much as 30% of the fund in cash in 2007, he now holds just 10%.
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