(GuruFocus, February 24, 2010) Investment Guru Jeremy Grantham manages tens of billions. For 4Q09, he reported a US traded stock portfolio of $30.13 billion dispersed among 835 stocks. In the quarter alone, he bought 117 new names. One would always be curious how he comes up with all the stock ideas. Maybe one day he will tell us how he does it, but for now, we have to settle with the quarterly update he presents.
Outlook
But he is pretty good in informing his investors what is on his mind as far as the market and economic outlook is concerned. Here are two recent documents that he publishes recently (you have to register and log in www.gmo.com to get access). I also post a paragraph from each document in order to drive a point.
1. 4Q 2009 GMO Quarterly Update Published on 1/29/2010
Markets are at or near pre-crisis levels. How they perform in 2010 will be determined by whether fundamentals play out at pre-crisis levels as well, or whether global economies remain in recession or even simply remain below what investors remember as trend growth. There are many obvious potential pitfalls and presumably many more hidden ones that could derail this V-shaped recovery in equity markets. Among the obvious ones are high levels in individual and sovereign debt and an increasing reliance on emerging markets as the saviors of the world economy. After as furious a rally as we’ve seen in 2009, it makes sense to be careful with risk and only take it when valuations are compelling. In many cases, stable low growth (either positive or negative) companies trading at less challenging valuations seem to be the prudent investment choices.
2. What A Decade! Published on 1/25/2010
There is perhaps, though, one saving grace: the risky stocks have already been driven to extreme overpricing. Further attempts to drive the market higher (they may not be deliberate attempts, but does it matter?) will probably result in a much broader advance in which high quality stocks should hold their own or even outperform. Believe it or not, they can outperform on the upside, and these times tend to be: later in bull markets, or when they are relatively cheaper than the rest of the market, or both. (More quantitatively, high quality stocks have outperformed in more than 40% of up months and approximately 60% of the time when they were relatively very cheap, as they are now.) For the record, they also outperformed in 1929 and 1972, at the end of the fi rst two great bull markets of the 20th century, and held level in 1999. In a continuing rally, even level pegging for quality would be a great improvement over 2009. And, if the market surprises me and goes into an early setback in 2010, then quality stocks should outperform by a lot. What could cause an early setback would be some random bunching up of unpleasant seven-lean-years data: two or three bad news items in a week or two might do the trick. This would suit me – cheaper is always better – but given the Fed’s intractability, it seems less likely than some further gains. For the longer term, the outperformance of high quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, “nearly certain” (which phrase we at GMO traditionally define as more than a 90% probability).
In his mind, there are not too many bargains in the market anymore. If one really wants to look for bargains, look for them among the “high quality stocks” then.
Sector Allocation
As a diversified top-down investor, Grantham’s sector allocation probably carries more information than that of a concentrated bottom-up investor such as Bruce Berkowitz, Mohnish Pabrai. As of December 31, 2009, Grantham’s top sectors are Technology (24.6%), Health Care (22.8%), Consumer Goods (15.8%) and Consumer Services (11.1%). See table below:
Top Holdings
So what he means by “high quality stocks”? His top holdings may shine light on the question:
No. 1: Johnson & Johnson (JNJ, Financial), Weightings: 5.52% - 25,835,685 Shares Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $175.06 billion; its shares were traded at around $63.45 with a P/E ratio of 13.7 and P/S ratio of 2.8. The dividend yield of Johnson & Johnson stocks is 3.1%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 5-star.
Grantham increased his JNJ holding slightly during 4Q09.
No. 2: Microsoft Corp. (MSFT, Financial), Weightings: 5.27% - 52,120,871 Shares Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft Corp. has a market cap of $254.21 billion; its shares were traded at around $28.63 with a P/E ratio of 15.2 and P/S ratio of 4.3. The dividend yield of Microsoft Corp. stocks is 1.8%. Microsoft Corp. had an annual average earning growth of 10% over the past 10 years.
Grantham sold a very small percentage of his MSFT shares during 4Q09 (from 53.26 million shares to 52.12 million shares).
No. 3: Oracle Corp. (ORCL, Financial), Weightings: 5.05% - 62,059,737 Shares Oracle Corporation is one of the world's suppliers of software for information management. Oracle Corp. has a market cap of $124.13 billion; its shares were traded at around $24.77 with a P/E ratio of 17.2 and P/S ratio of 5.3. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
Grantham upped his holding in ORCL from 54.8 million shares to 62.1 million shares.
No. 4: WalMart Stores Inc. (WMT, Financial), Weightings: 4.88% - 27,512,308 Shares Wal-Mart Stores, Inc. is the world's largest retailer. Walmart Stores Inc. has a market cap of $205.45 billion; its shares were traded at around $53.92 with a P/E ratio of 14.7 and P/S ratio of 0.5. The dividend yield of Walmart Stores Inc. stocks is 2%. Walmart Stores Inc. had an annual average earning growth of 13.3% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
Grantham increased his holding in WMT from 26.4 million to 27.5 million.
No. 5: Pfizer Inc (PFE, Financial), Weightings: 4.45% - 73,677,015 Shares Pfizer Inc is a research-based, global pharmaceutical company. Pfizer Inc has a market cap of $143.72 billion; its shares were traded at around $17.81 with a P/E ratio of 8.9 and P/S ratio of 2.9. The dividend yield of Pfizer Inc stocks is 4.1%. Pfizer Inc had an annual average earning growth of 11% over the past 10 years.
Grantham increased his position in PFE from 70.6 million shares to 73.7 million shares.
No. 6: The CocaCola Company (KO, Financial), Weightings: 4.08% - 21,549,930 Shares The Coca-Cola Company is the world's largest beverage company and is the producer and marketer of soft drinks. The Cocacola Company has a market cap of $127.82 billion; its shares were traded at around $55.16 with a P/E ratio of 18.1 and P/S ratio of 4.1. The dividend yield of The Cocacola Company stocks is 3%. The Cocacola Company had an annual average earning growth of 5.3% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 2.5-star.
Grantham sold a tiny portion (0.25 million shares) of his KO shares.
Comments
Despite the fact Grantham owns a very diversified portfolio, his top holdings are very heavily weighted. As of December 31, 2009, he has filled his portfolio with blue chips in Technology, Health Care, Consumer Services, and Consumer Goods.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Jeremy Grantham for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
Outlook
But he is pretty good in informing his investors what is on his mind as far as the market and economic outlook is concerned. Here are two recent documents that he publishes recently (you have to register and log in www.gmo.com to get access). I also post a paragraph from each document in order to drive a point.
1. 4Q 2009 GMO Quarterly Update Published on 1/29/2010
Markets are at or near pre-crisis levels. How they perform in 2010 will be determined by whether fundamentals play out at pre-crisis levels as well, or whether global economies remain in recession or even simply remain below what investors remember as trend growth. There are many obvious potential pitfalls and presumably many more hidden ones that could derail this V-shaped recovery in equity markets. Among the obvious ones are high levels in individual and sovereign debt and an increasing reliance on emerging markets as the saviors of the world economy. After as furious a rally as we’ve seen in 2009, it makes sense to be careful with risk and only take it when valuations are compelling. In many cases, stable low growth (either positive or negative) companies trading at less challenging valuations seem to be the prudent investment choices.
2. What A Decade! Published on 1/25/2010
There is perhaps, though, one saving grace: the risky stocks have already been driven to extreme overpricing. Further attempts to drive the market higher (they may not be deliberate attempts, but does it matter?) will probably result in a much broader advance in which high quality stocks should hold their own or even outperform. Believe it or not, they can outperform on the upside, and these times tend to be: later in bull markets, or when they are relatively cheaper than the rest of the market, or both. (More quantitatively, high quality stocks have outperformed in more than 40% of up months and approximately 60% of the time when they were relatively very cheap, as they are now.) For the record, they also outperformed in 1929 and 1972, at the end of the fi rst two great bull markets of the 20th century, and held level in 1999. In a continuing rally, even level pegging for quality would be a great improvement over 2009. And, if the market surprises me and goes into an early setback in 2010, then quality stocks should outperform by a lot. What could cause an early setback would be some random bunching up of unpleasant seven-lean-years data: two or three bad news items in a week or two might do the trick. This would suit me – cheaper is always better – but given the Fed’s intractability, it seems less likely than some further gains. For the longer term, the outperformance of high quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, “nearly certain” (which phrase we at GMO traditionally define as more than a 90% probability).
In his mind, there are not too many bargains in the market anymore. If one really wants to look for bargains, look for them among the “high quality stocks” then.
Sector Allocation
As a diversified top-down investor, Grantham’s sector allocation probably carries more information than that of a concentrated bottom-up investor such as Bruce Berkowitz, Mohnish Pabrai. As of December 31, 2009, Grantham’s top sectors are Technology (24.6%), Health Care (22.8%), Consumer Goods (15.8%) and Consumer Services (11.1%). See table below:
| Industry | 2009-09-30 | 2009-12-31 |
|---|---|---|
| Technology | 23% | 24.6% |
| Financials | 5.2% | 5.9% |
| Utilities | 0.6% | 0.6% |
| Telecommunications | 2.9% | 2.9% |
| Consumer Services | 11.4% | 11.1% |
| Health Care | 23.4% | 22.8% |
| Consumer Goods | 17.1% | 15.8% |
| Industrials | 3.9% | 3.8% |
| Basic Materials | 1.2% | 1.6% |
| Oil & Gas | 9.3% | 8.8% |
Top Holdings
So what he means by “high quality stocks”? His top holdings may shine light on the question:
No. 1: Johnson & Johnson (JNJ, Financial), Weightings: 5.52% - 25,835,685 Shares Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $175.06 billion; its shares were traded at around $63.45 with a P/E ratio of 13.7 and P/S ratio of 2.8. The dividend yield of Johnson & Johnson stocks is 3.1%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 5-star.
Grantham increased his JNJ holding slightly during 4Q09.
No. 2: Microsoft Corp. (MSFT, Financial), Weightings: 5.27% - 52,120,871 Shares Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft Corp. has a market cap of $254.21 billion; its shares were traded at around $28.63 with a P/E ratio of 15.2 and P/S ratio of 4.3. The dividend yield of Microsoft Corp. stocks is 1.8%. Microsoft Corp. had an annual average earning growth of 10% over the past 10 years.
Grantham sold a very small percentage of his MSFT shares during 4Q09 (from 53.26 million shares to 52.12 million shares).
No. 3: Oracle Corp. (ORCL, Financial), Weightings: 5.05% - 62,059,737 Shares Oracle Corporation is one of the world's suppliers of software for information management. Oracle Corp. has a market cap of $124.13 billion; its shares were traded at around $24.77 with a P/E ratio of 17.2 and P/S ratio of 5.3. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
Grantham upped his holding in ORCL from 54.8 million shares to 62.1 million shares.
No. 4: WalMart Stores Inc. (WMT, Financial), Weightings: 4.88% - 27,512,308 Shares Wal-Mart Stores, Inc. is the world's largest retailer. Walmart Stores Inc. has a market cap of $205.45 billion; its shares were traded at around $53.92 with a P/E ratio of 14.7 and P/S ratio of 0.5. The dividend yield of Walmart Stores Inc. stocks is 2%. Walmart Stores Inc. had an annual average earning growth of 13.3% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
Grantham increased his holding in WMT from 26.4 million to 27.5 million.
No. 5: Pfizer Inc (PFE, Financial), Weightings: 4.45% - 73,677,015 Shares Pfizer Inc is a research-based, global pharmaceutical company. Pfizer Inc has a market cap of $143.72 billion; its shares were traded at around $17.81 with a P/E ratio of 8.9 and P/S ratio of 2.9. The dividend yield of Pfizer Inc stocks is 4.1%. Pfizer Inc had an annual average earning growth of 11% over the past 10 years.
Grantham increased his position in PFE from 70.6 million shares to 73.7 million shares.
No. 6: The CocaCola Company (KO, Financial), Weightings: 4.08% - 21,549,930 Shares The Coca-Cola Company is the world's largest beverage company and is the producer and marketer of soft drinks. The Cocacola Company has a market cap of $127.82 billion; its shares were traded at around $55.16 with a P/E ratio of 18.1 and P/S ratio of 4.1. The dividend yield of The Cocacola Company stocks is 3%. The Cocacola Company had an annual average earning growth of 5.3% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 2.5-star.
Grantham sold a tiny portion (0.25 million shares) of his KO shares.
Comments
Despite the fact Grantham owns a very diversified portfolio, his top holdings are very heavily weighted. As of December 31, 2009, he has filled his portfolio with blue chips in Technology, Health Care, Consumer Services, and Consumer Goods.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Jeremy Grantham for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
