4 Value Plays From A Little-Known Guru

Tuesday, June 3, 2014 - 5:15pm

by Eric Winter

The list of top-performing value investors is filled with names that have been praised in the public eye for decades -- like Warren Buffett, for instance. 

Often, the investing methodology is similar among these gurus: Find solid companies with good management that are intrinsically undervalued and have long-term growth potential.

One billionaire fund manager has taken this tried-and-true mantra and delivered eye-popping results for over 20 years now -- while keeping a fairly low profile. 

Donald Yacktman founded his fund, Austin, Texas-based Yacktman Asset Management, in 1992. Since then, he has garnered much respect from both the financial community and no doubt from his investors as well, who have taken his hard work and results straight to the bank.

Together with his portfolio management team, which includes his son Stephen Yacktman, Donald Yacktman has set himself apart with research-driven ideas that have seen his assets under management grow at amazing rates. His most recent Form 13F shows his portfolio at nearly $24 billion mark and was at one point receiving inflows of $20 million a day. 

With the recent release of his 13F for the first quarter of 2014, we can see how he is employing his fund's massive amounts of capital. Let's take a closer look at some of the higher-yielding investments in his portfolio.

Two of his best income producers come from the same industry: tobacco. In fact, they both originated from the same company. Both Altria Group (NYSE: MO) and Philip Morris International (NYSE: PM) have found a home in Yacktman's funds for years and currently offer dividend yields of 4.7%, and 4.3%, respectively.

For those why may not be aware, Altria was initially known as Philip Morris, but the name was changed in 2003, followed by a spin-off of Phillip Morris International in 2008 to increase freedom of operations outside of U.S. governance.

Both MO and PM stand to become lead players in the ever-growing e-cigarette market, a trend that continues to gather steam in 2014. Although Wall Street analysts are overwhelmingly neutral on the tobacco giants as a whole, firms such as RBC Capital Markets see the companies' existing resources and channels of distribution as huge benefits to thwart outside competition.

As the FDA moves closer to regulating the e-cig industry, the larger players are poised to come out on top as barriers to entry rise. Competitor Lorillard (NYSE: LO), which pays a 4% dividend, is the current leader in the $2 billion industry, accounting for nearly 50% of offerings in convenience stores.

Yacktman has also found impressive dividend income from office products company Staples (Nasdaq: SPLS), which pays a respectable 4.3%. His 2.3 million shares have seen better days, however, as the stock currently trades near 52-week lows, having recently been cut to "sell" by Goldman Sachs (which bumped up competitor Office Depot (NYSE: ODP) to "buy" the same day).

However, the office supply retailer industry is contracting across the board, with both Staples and Office Depot closing stores across the U.S. Yacktman is known for his Buffett-esque strategies (such as buying and holding when others flee) -- we'll see whether this stake works out in his favor.

Clorox (NYSE: CLX) is another consumer staple in the fund's holdings, a sector that accounts for over 40% of Yacktman's investments. After a dividend increase last month, Clorox now pays shareholders a 3.4% yield. The bump has positive implications for both future earnings growth and cash flow, two metrics lauded by investors like Yacktman.

Clorox has been in the news recently due to an insider trading allegation involving Carl Icahn, who is being investigated on accusations that pro golfer Phil Mickelson and gambler Bill Walters were tipped off prior to Icahn's large stake in CLX (and subsequent takeover bid) in 2011.

Risks to Consider: Evaluating successful managers' filings is a great starting point to generate investing ideas, especially when singling out long-oriented value investors like Yacktman. However, these filings should be used only as starting points for further research and due diligence. Additionally, Yacktman reduced many of his positions in the first quarter of 2013, hinting at some profit-taking or a move to cash.  

Action to Take --> After posting solid returns throughout his career, Donald Yacktman closed his funds to new investors at the end of last year. To mimic his performance, scrutinize these portfolio picks to see whether they could be a good fit for your portfolio as well.  

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Eric Winter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of CLX, MO, PM in one or more of its “real money” portfolios.