People now recognize Yacktman’s mastery after he avoided two crises caused by bursting bubbles and made sizable returns in the years following them. But during the bubbles, his contrarian stances and lagging returns made many people give up on him, as it looked like he was missing the party. During the tech boom of the late 1990s, his board even tried to oust him because he switched to non-tech small-cap stocks and his returns trailed the market. Then, the following three years, from 2000-2002, he beat the market, which remained in negative territory.
Yacktman’s investment philosophy is based on a triangle where the three sides represent: a low purchase price, good business and shareholder-oriented management.
In a Value Investor Insight interview, Yacktman elaborated on his strategy: “The growth aspect speaks primarily to our focus on business quality. We’re not usually looking for the scruffy cyclical or turnaround story, but for businesses with high market shares in their principal product or service lines, with long product cycles but short customer-repurchase cycles, and with relatively low capital requirements that allow the company to generate high cash returns on tangible assets while growing. We’ve always considered business requiring enormous amount of capital for fixed assets, especially when they’re economically sensitive, to be at a big disadvantage.”
Yacktman’s 2011 results bested even David Einhorn’s 2.9% at Greenlight, Whitney Tilson’s -25% for his T2 Accredited Fund and John Paulson’s 45% for his Advantage Fund. Here is how he did it.
The first reason Yacktman’s fund outperformed is that he conserved capital by making his largest positions stable, large-cap companies that are less economically sensitive. “Our top positions continue to be in some of the greatest businesses in the world. Many of these companies offer products or services that are staples of today’s global society, giving their businesses a level of predictability and consistency which we think is especially valuable in an environment where there is a high degree of uncertainty,” Yacktman said in his year-end letter.
His top position is in PepsiCo Inc. (PEP), of which he owns 19,592,104 shares, and most recently added 4,484,395 shares in the third quarter of 2011 at about $64.18 per share. While the company did not contribute significant returns, it proved itself less susceptible to market conditions by ending the challenging year almost flat.
PepsiCo has extremely strong financials. Its revenue has been on a steady incline for the last decade, increasing at an annual rate per share of 10.4%. In 2010, it increased to $57.9 billion from $43.2 billion in 2009. It also generated record free cash flow of $5.3 billion in 2010. Both the company’s return on equity and return on assets declined from 2009 to 2010, but are up for the trailing 12 months.
His third largest position was Procter & Gamble Co. (PG), which turned out to be another good business to conserve capital. It was up about 1% after a year of ups and downs. Yacktman has held Procter & Gamble since at least the second quarter of 2007, when it traded for about $63. On Thursday it trades for $66.
His second largest holding, News Corp. (NWSA), had a major impact on his returns, appreciating about 39% over the last year. Yacktman has been increasing his position in News Corp. since he first bought in the first quarter of 20009 at about $6.80 per share. At the end of the third quarter, he owned 77,079,367 shares and the stock trades at almost $20 on Thursday.
Yacktman called the stock his “most controversial” holding, due to the phone hacking scandal at one of its newspapers in the UK. When the scandal sent down its stock price, he bought more. “We did not think that the company’s most valuable assets, cable and television content, would be materially impacted by the scandal,” he wrote in his shareholder letter. “This proved to be the case, and News Corp’s cable and television content businesses posted another stellar year in 2011, achieving high rates of growth in revenues and earnings. From August through the end of the year, News Corp management repurchased $2.5 billion of stock, representing more than 5% of the company’s outstanding shares, at what we think were very attractive prices. At less than 12 times our estimate of calendar 2012 earnings per share, we think News Corp is still inexpensive.”
Of his top 10 holdings, only two ended the year down, Microsoft Corp. (MSFT) and Cisco Systems (CSCO), and both 10% or less.
Two of the biggest detractors to Yacktman’s portfolio were Research In Motion (RIMM) and Avon Products Inc. (AVP). RIM was the worst performer, down 60% since Yacktman initiated a position with 2,948,575 shares in the second quarter of 2011 at $44 per share. In the third quarter he added 497,280 more at about $27 per share. On Thursday, RIM trades for $14.50 per share.
In its third quarter results released Dec. 15, 2011, RIM reported its revenue was down 6% year over year and up 24% sequentially. Earnings were $265 million, down from $329 million in the previous quarter and $911 million the same quarter the previous year. However, Yacktman thinks of businesses on 10-year time horizons, and RIM is a relatively small position for them.
“There are a lot of things that could happen in a positive way,” Yacktman told Bloomberg in October. “I mean they have a lot of patents as everybody knows. They could come up with new ideas. In technology, the problem is you have a lot of shooting stars. And this one, a lot of people worry that it is in the fade stage. Time will tell. But when you do this investing the way we do, it requires a lot of patience. And that’s what we have.”
Yacktman’s ability to pick undervalued stocks that resist market volatility has helped him conserve capital through another difficult year. See more of his stock holdings here.