First Pacific Advisors, a large investment fund managed by Robert Rodriguez and Steven Romick, recently filed its 13F with the SEC. This document disclosed many of the fund’s long equity positions as of the end of September and allows investors the opportunity to use its picks as a jumping-off point for further analysis or to try to see what the investment team is thinking about the markets. Below we’ve included our thoughts in the fund’s top five positions; read on and compare First Pacific’s picks to their previous filings.
Aon PLC (NYSE:AON), an $18 billion market cap insurance broker, was the fund’s largest position by market value reported on the 13F. The company’s recent growth has been limited, with Aon reporting 3% earnings growth in the third quarter compared to a year ago on flat revenue. However, the stock trades at 19 times trailing earnings as the financial community expects that growth rate to pick up in 2013 (the forward P/E is only 12 as the sell-side seems to be a bit more bullish than investors). Southeastern Asset Management, managed by Mason Hawkins, had over $1 billion invested in the company at the end of June. We might avoid it as the stock is so dependent on a pickup in growth.
CVS Caremark Corporation (NYSE:CVS) has been a big beneficiary of the battle between Express Scripts and Walgreens, with the company believing that it will keep many former Walgreens customers. Read more about the pharmacy and prescription filling industry. First Pacific actually sold shares of the company, reporting 7.8 million shares in its portfolio as opposed to 8.1 million three months earlier, but it is still a large holding. CVS’s revenue and earnings grew at double-digit rates between last quarter and the third quarter of 2011, and with an expectation of continued growth the stock trades at 12 times forward earnings estimates. We think that there’s probably a good investment opportunity somewhere in the industry.
The fund kept its position in Covidien plc (NYSE:COV) about even at 5.3 million shares. Covidien is a medical device and generic pharmaceuticals company with a market capitalization of about $27 billion. It recently reported slight growth in income versus the same period in the previous year, and its trailing P/E is in the low teens. Wall Street analysts, again, expect continued growth and the stock could indeed be cheap at 13 times consensus earnings for 2014 and a moderate dividend yield. We would want to take a look at it as a value play.
First Pacific cut its stake in ENSCO PLC (NYSE:ESV), a contract offshore oil and gas driller, from 7.2 million shares to 5.7 million, but partly because of an increase in the stock price it remained among the fund’s top five holdings. ENSCO has been having a great year; in its report for the third quarter it reported revenue that was 23% higher and earnings that were 68% higher than in the third quarter of 2011. It trades at 11 times trailing earnings, 8 times forward earnings estimates, and a five-year PEG ratio of 0.4. Investors should look at it as a potential value stock.
Western Digital Corp. (NASDAQ:WDC) rounded out the fund’s top picks with Rodriguez, Romick, and their team reporting a position of 8.1 million shares (down slightly from 8.2 million at the beginning of July). Western Digital is an $8.6 billion market cap data storage company. A number of value investors have looked at different data storage companies for their attractive pricing, and at a trailing P/E of only 5 (with little change in net income expected next year) the company certainly looks cheap at first glance. With the company growing quickly and paying a solid dividend, it’s another pick we want to look at more closely.
