John Reese is CEO of Validea.com and Validea Capital, the manager of an actively managed ETF. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it today – Globe and Mail readers get an exclusive 25-per-cent discount.
The Brazilian billionaire partners at the private-equity firm 3G Capital have often been compared to Berkshire Hathaway billionaire Warren Buffett.
The two big investors have teamed up on some high-profile deals, notably the acquisition of H.J. Heinz and the subsequent merger of Heinz and Kraft, not to mention the recently abandoned approach by Kraft Heinz to buy Unilever.
But while Berkshire Hathaway's portfolio is weighted heavily to stocks of consumer-goods companies and – owing to a big bet on Apple and IBM – technology, 3G's stock holdings include a heavy dose of energy, basic materials and telecommunication shares.
The 3G stock portfolio appears to be a bullish bet on industrial growth and production, as well as the heightened infrastructure spending anticipated under the current administration in Washington. Berkshire's holdings are a play on consumer confidence, heavy on banks, consumer brands and airlines – companies that benefit from increased consumer spending.
Sure, there are some overlaps. Berkshire and 3G both hold shares of Charter Communications, which bought Time Warner Cable and Bright House last year to create the second-largest broadband provider and dominate big markets such as Los Angeles and New York.
But that's where they diverge. 3G, founded by Alex Behring, Jorge Paulo Lemann, Carlos Sicupira, Marcel Hermann Telles and Roberto Thompson Motta, sold its remaining shares of Apple in the last three months of 2016, the same period in which Berkshire was loading up on them. 3G still does hold shares of Microsoft and Comcast.
The Brazilian investors also seem to favour railways, oil and steel stocks. It holds shares of both Canadian Pacific and Union Pacific as well as Cabot Oil & Gas, Halliburton, Kinder Morgan, AK Steel Holdings and Steel Dynamics.
New holdings in the most recent quarter include the Dallas-based oil-and-gas company RSP Permian; the Frederick, Md.-based industrial mineral producer U.S. Silica; Tenaris, the European maker of steel pipes; Agnico Eagle Mines; Canadian Natural Resources; Houston-based Cabot Oil & Gas; and AK Steel.
Berkshire's portfolio favours big American consumer banks such as Wells Fargo, Goldman Sachs and U.S. Bancorp in an industry that is poised to benefit from reduced regulation, and consumer brands such as Coca-Cola and Kraft Heinz.
By looking at the holdings of 3G and Berkshire we can find core themes that both firms are following, and using my guru models, which are based on the strategies of legendary investors, including Warren Buffett, David Dreman and many others, we can seek out stocks that score highly fundamentally that might be flying under the radar.
Railways: Canadian Pacific scores highly on our momentum investor model, and investors should note it's been on a run lately, trading near its 52-week high at around $72. Its relative strength has also been gaining, an indication it could be close to another break-out. Railways stand to benefit from gains in production and infrastructure spending.
Basic materials: Teck Resources, the Canadian producer of zinc and other natural resources, fits into the strategy of David Dreman, a contrarian investor who tries to identify stocks that have been overlooked. Teck's debt-to-equity ratio of 47.8 per cent is far lower than its industry's 149.8 per cent. And Teck's earnings per share have been growing faster over the past six months, at 203 per cent, than the S&P, at 5.6 per cent.
Industrials: Owens Corning is another momentum stock, this maker of glass fibre and composite materials used in a host of industries has consistently gaining earnings growth over the last five years. The construction supply sector has been one of the consistently strong, and Corning is a leading brand.
Consumer brands: General Motors fits squarely into the strategy I run based on the approach outlined by quantitative investing authority James O'Shaughnessy. The auto maker looks poised for growth as consumers find more purchasing power because of lower fuel prices and rising wages. GM also pays a solid 4.1-per-cent dividend for investors looking for income.
Banks: While American banks are trading higher on the prospect of deregulation, some
European banks might be overlooked. Swedbank AB (symbol SWDBY) in Sweden and the Baltics fits into Mr. Dreman's strategy. Its price-to-earnings ratio of 12.6 is in the bottom quarter of stocks, yet its pretax margin is 47 per cent, well above Mr. Dreman's threshold for a stock that is poised to rebound.