While the stock analysts at Morningstar spend the majority of their time hunting for quality companies trading at attractive valuations, we would be remiss if we failed to acknowledge the fact that a whole host of individuals outside of Morningstar are engaged in the very same effort.
We're not as interested in what all investment managers think, though, so much as we are in what the best in the business are doing. As such, we maintain a list of 26 managers that we believe are worth monitoring on a regular basis.
Based on the early read we've had of the buying and selling activity of our top managers during the fourth quarter of 2015, it appears that the ongoing trend of high-conviction purchases of firms with wide economic moats continued during the most recent period.
Outright sales were fairly broad based, but the healthcare sector accounted for three of the top 10 outright sales; narrow-moat Valeant Pharmaceuticals (VRX), wide-moat Express Scripts (ESRX) and Medtronic (MDT), while the technology sector; wide-moat Accenture (ACN) and narrow-moat Qualcomm (QCOM), and financial services sector; narrow-moat Chubb (CB) and wide-moat Wells Fargo (WFC), each represented two outright sales during the period.
Below we highlight three sell stocks for the Ultimate Stock Pickers in recent months, and what Morningstar equity analysts think of the companies.
Alphabet (GOOGL)
With dominant Internet search product Google as its foundation, Alphabet has built an impressive portfolio that individuals use frequently, beyond Google search, says Morningstar equity analyst Neil Macker. These new products allow advertisers to reach out to potential customers multiple times, in multiple ways.
As consumers use multiple devices in a post-PC world, their changing behaviours shine a light on other successful products Alphabet has built in order to keep a hold on users and provide a greater benefit to advertisers. Google's mobile operating system and browser help to unify users' experience as they move from one device to another. The firm's success in products such as Gmail, the Chrome browser, and Google Maps provides a cohesive experience for users and helps Google show more relevant ads. Our general thesis for the online media sector assumes that digital ad spending will consolidate around companies with unique assets and reach, such as Google and Facebook.
Pfizer (PFE)
Pfizer's foundation remains solid, based on strong cash flows generated from a basket of diverse drugs says Morningstar equity analyst Damien Conover. The company's large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business. Pfizer's size establishes one of the largest economy of scale in the pharmaceutical industry.
In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer, heart disease, and immunology.
Prudential Financial (PRU)
An aggressive push into spread-based, equity-linked products, including variable annuities, cost Prudential dearly during the 2008 financial crisis says Morningstar equity analyst Vincent Lui. During the past six years, though, Prudential has worked through most of these issues and is back on the growth path, which is nothing short of remarkable, in our view.
The company's outward-looking strategy led to the 2011 acquisition of Star Life and Edison Life from AIG in Japan, further solidifying its leadership position in that country. In contrast to its penchant for spread income in the past, Prudential has been driving a careful expansion into fee-based income, highlighted by its recent success in large-case pension risk transfer transactions that should provide highly visible cash flows.
