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Some of the best investment managers have made Devon Energy one of their top picks, by either initiating or significantly increasing their stakes in the oil and gas exploration and production firm.
This came to light as part of Morningstar's tracking of the stock picks of 26 of its highest-rated funds for its Ultimate Stock Pickers series.
The fund-rating firm sifts through the 26 funds' quarterly reports for their top new buys and for particularly significant increases in existing holdings quarterly.
Devon Energy popped up in both categories in the second quarter, when five of the 26 funds made "high conviction" purchases, which represent fund managers' additions to already existing holdings in their funds in the same stock during any single period, or new stakes. Three funds initiated positions in the stock in the period, while two bumped up their stakes.
"It is rare to see five of our Ultimate Stock Pickers making high-conviction purchases and the fact that three of the managers that were buying were building new positions in the name is, in our view, an indication of strong conviction behind the name," said Brett Horn, a Morningstar associate director, in a report.
That means seven of Ultimate Stock Pickers funds now hold the stock, he added.
This came in the second quarter, a period when world oil prices fell by 20 per cent, "impacting the stock prices of just about every firm in the (oil and gas) sector," said the report. "So it wasn't as though there weren't plenty of buying opportunities to be had during the period, making the purchase of Devon stand out even more."
The Oakmark fund's Oakmark Equity & Income and Oakmark initiated new, sizable positions in Devon Energy, committing 1.7 per cent and 1.4 per cent of their portfolios, respectively, Morningstar said.
Oakmark's famed investment manager, William Nygren, told his firm's investors in a note explaining the choice that 80 per cent of Devon's revenue and value stem from its oil and oil liquids business, and not from the natural gas that many investors are focused on. "Based on our estimates, the stock is now trading at just over half of its 2013 asset value," he said. "And we are not assuming any oil price recovery in our numbers."
But Devon, now trading at $61.19 (U.S.), is down 4 per cent over the past three months and 2.3 per cent on the year.
Another notable buy on the part of the investment managers is Thermo Fisher Scientific, a manufacturer of sophisticated medical and industrial laboratory equipment. RS Capital Appreciation initiated a high-conviction stake in the second quarter while FPA Crescent boosted its existing allocation by 40 per cent in the period.
"The managers at RS Capital Appreciation were attracted by the company's global reach, wide product portfolio, and what they see as a value-creative growth strategy at the firm," the Morningstar report said.
Top funds are also showing increasing interest in Bruce Berkowitz's Fairholme fund's pet project, the insurer American International Group. Two new funds initiated stakes in the company in the second quarter.
A couple of other off-the-beaten-path stock selections by the funds include purchases of the international freight forwarder Expeditors International of Washington and a substantial new position by a fund in Life Technologies, one of the largest intellectual property owners in the life sciences industry.
As a reference, the S&P 500 is up 14 per cent this year after losing 2.75 per cent in the second quarter.
Here are 10 stocks that Morningstar's "Ultimate Stock Picker" fund managers made significant purchases of during the second quarter, ranked in inverse order of analysts' "buy" ratings:
10. Expeditors International of Washington
Company profile: Expeditors, with a market value of $8-billion, is an international air and ocean freight forwarder and customs broker.
Dividend yield: 1.38 per cent
Investor takeaway: Its shares are down 5 per cent this year but have a three-year, average annual return of 6 per cent. Analysts give its shares five "buy" ratings, one "buy/hold," 12 "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P. Analysts' consensus estimate is for earnings of $1.64 per share in the current fiscal year, growing by 19 per cent to $1.95 per share next year.
9. Life Technologies
Company profile: Life Technologies, with a market value of $8- billion, is one of the largest intellectual property owners in the life sciences industry as a developer and manufacturer of research products and instruments for biotechnology and biopharmaceutical researchers.
Investor takeaway: Its shares are up 10.6 per cent this year and have a three-year, average annual return of 0.24 per cent. Analysts give its shares eight "buy" ratings, five "buy/holds," five "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P.
Analysts' consensus estimate is for earnings of $3.95 per share this year, and rising 9 per cent to $4.30 per share next year. S&P has it rated "buy" with a $56 price target, which is a 20 per cent premium to the current price.
8. St. Jude Medical
Company profile: St. Jude, with a market value of $12 -billion, is a maker of mechanical heart valves, pacemakers, defibrillators, and other cardiac devices.
Dividend yield: 2.46 per cent
Investor takeaway: Its shares are up 12 per cent this year and have a three-year, average annual return of 1.3 per cent. Analysts give its shares 10 "buy" ratings, nine "buy/holds," eight "holds," and one "sell," according to a survey of analysts by S&P.
S&P has it rated "buy," with a $45 price target, a 20-per-cent premium to the current price. Analysts' consensus estimate is for earnings of $3.43 per share this year and growth of 6 per cent to $3.62 per share next year.
7. American International Group
Company profile: AIG, with a market value of $59-billion, is one of the largest insurance and financial services firms in the world, even after disposing of various assets after it required a government bailout in the nation's financial crisis of 2008.
Investor takeaway: Its shares are up 47 per cent this year and have a three-year average annual return of 7.4 per cent. Analysts give its shares 10 "buy" ratings, three "buy/holds," and eight "holds," according to a survey of analysts by S&P.
S&P, which has it rated "buy," says "we view the shares as undervalued versus its peers and historical averages, particularly on a price-to-book basis. We caution that a high degree of execution risk remains in AIG's turnaround strategy, although we believe (it) has made considerable progress."
6. Devon Energy
Company profile: Devon, with a market value of $24 -billion, is one of the biggest independent exploration and production companies in North America. The firm's asset base includes conventional and unconventional oil and natural gas properties throughout North America with a renewed emphasis on on-shore plays.
Dividend yield: 1.23 per cent
Investor takeaway: Its shares are down 2.3 per cent this year and have a three-year, average annual decline of 1.1 per cent. Analysts give its shares 10 "buy" ratings, eight "buy/holds," and nine "holds," according to a survey of analysts by S&P.
S&P has it rated "buy" with a $72 price target, a 22-per-cent premium to the current price. Morningstar analyst Mark Hanson says that while Devon's growth is slower than some of its peers, it should generate strong returns on capital over the next several years, with a balanced production mix that provides leverage to price moves in both oil and natural gas, and a conservative approach that helps minimize franchise risk.
5. Thermo Fisher Scientific
Company profile: Thermo Fisher, with a market value of $21-billion, is a manufacturer and developer of analytical and laboratory instruments used in life sciences, drug discovery and industrial applications.
Dividend yield: 0.9 per cent
Investor takeaway: Its shares are up 26 per cent this year and have a three-year average annual return of 7.4 per cent. Analysts give its shares 11 "buy" ratings, five "buy/holds," and four "holds," according to a survey of analysts by S&P. Analysts' consensus estimate is that it will earn $4.81 per share this year and expect that earnings will grow by 10 per cent to $5.31 per share next year.
4. JPMorgan Chase & Co.
Company profile: JPMorgan, with a market value of $143-billion, is one of the world's largest investment banks, and also offers retail and card financial services, commercial banking, treasury and securities services, and asset management.
Dividend yield: 2.89 per cent
Investor takeaway: Its shares are up 17 per cent this year but have a three-year, average annual decline of 3 per cent. Analysts give its shares 12 "buy" ratings, 10 "buy/holds," eight "holds," and two "weak holds," according to a survey of analysts by S&P.
Analysts' consensus estimate is for earnings of $4.65 per share this year and growth of 12 per cent to $5.23 next year. Two Ultimate Stock Pickers funds initiated stakes in the second quarter.
3. National Oilwell Varco
Company profile: National Oilwell Varco, with a market value of $33-billion, is one of the largest equipment suppliers in the drilling industry. It provides rigs, parts and repair services. Two funds from the Morningstar Ultimate Stock Pickers list initiated positions in the company in the second quarter.
Dividend yield: 0.6 per cent
Investor takeaway: Its shares are up 15 per cent this year and have a three-year annualized return of 27 per cent. Its 10-year annualized return is a huge: 24 per cent.
S&P's survey of analysts found 13 "buy" ratings, 9 "buy/holds," and two "holds." S&P has its shares rated "buy," with a $97 price target, a 24-per-cent premium to its current price. It says the company is "an attractive play on the need for new rig equipment, particularly for deep water and unconventional natural gas projects."
Analysts' consensus estimate is for earnings of $5.95 per share this year and growth of 15 per cent to $6.87 per share next year.
2. Oracle Corp.
Company profile: Oracle, with a market value of $154-billion, makes and sells corporate enterprise IT products, including hardware, software, and product support.
Dividend yield: 0.76 per cent
Investor takeaway: Its shares are up 24.5 per cent this year and have a three-year, average annual return of 13.6 per cent. Analysts give its shares 15 "buy" ratings, 17 "buy/holds," and 13 "holds," according to a survey of analysts by S&P. Analysts' consensus estimate is for earnings of $2.67 per share in the current fiscal year, and growth of 9 per cent to $2.92 next year. There were two high-conviction buys of Oracle among Ultimate Stock Picker funds in the second quarter.
1. Google
Company profile: Google, with a market value of $220-billion, is an Internet search engine that generates revenue when users click or view advertising related to their searches.
Investor takeaway: Its shares are up 3.7 per cent this year and have a three-year, average annual return of 13 per cent. Analysts give its shares 20 "buy" ratings, 14 "buy/holds," and eight "holds," according to a survey of analysts by S&P.
Analysts' consensus estimate is for earnings of $42.57 per share this year and growth of 17 per cent to $49.61 next year. Its forward price-to-earnings ratio is a relatively high 14.3.
S&P has it rated "hold" on valuation issues and what it says could be the potentially muddled results from the company's May acquisition of Motorola Mobility for $12.5-billion. There were two high-conviction buys of Google among Ultimate Stock Picker funds in the second quarter.