The Dodge & Cox Stock Fund outperformed the S&P 500 by 1.1% over the first quarter. The team wrote: "We remain optimistic about the long-term growth prospects of the U.S. and global economy, but caution that the overall equity market is not inexpensive...The equity market has changed significantly since the late 1990s, with changes in the Energy and Materials sectors being one example. As energy and materials prices have risen to recent highs, other investors' enthusiasm for stocks in these areas have increased, lifting valuations higher. In contrast, we have been trimming the Fund's exposure to these sectors."
As one of our senior associates once said, "as the price of a company's stock changes, you change the way you speak about it as an investment." The latest example: during the first quarter we sold the Fund's position in Rio Tinto. Rio Tinto continues to be one of the world's premier mining companies, but the stock's valuation (4 times annual company sales) has risen considerably since we initiated the position in 1998, and now incorporates high expectations for future profitability. This specific change, along with others, is reflected on a portfolio level: in early 1999, 25% of the portfolio was invested in Energy and Materials stocks while at this quarter end the weighting was 14%.
While many Energy and Materials stock valuations have risen, many of the very large companies that led the market in the late 1990s now have more reasonable valuations. Today, the largest capitalization stocks in the S&P 500 (those with market capitalizations greater than $100 billion) have valuations that are approximately 10-15% below the S&P 500's price-to-earnings ratio. As their valuations have descended, we have begun to identify more opportunities. Examples of recent purchases or significant additions over the past eighteen months include Citigroup, Exxon Mobil, GlaxoSmithKline, Pfizer, Sanofi-Aventis, Vodafone and Wal-Mart Stores. In addition to having more reasonable valuations, these "megacaps" are multi-national entities that should benefit from growth in the developing world and from the adoption and development of new technologies to make their businesses more efficient and competitive. We highlight the following three examples to illustrate our investment approach, not because we think they are more attractive than the Fund's other holdings:
Citigroup: Based in New York, Citigroup is the largest financial institution in the U.S. and second largest worldwide in assets ($1.2 trillion). It is one of the most diversified financial services companies by business and geographic footprint. Citigroup has recently lost its historic valuation premium due in part to a host of legal and regulatory issues, concerns about whether the company is too big to manage, and negative operating leverage. We believe Citigroup is an attractive investment because of its relatively low valuation of 11 times earnings, its emerging market franchise, a strategic focus on being one of the largest distributors of financial products, and its large excess capital generation.
Sanofi-Aventis: Based in Paris, Sanofi-Aventis is the world's third largest pharmaceutical company. Challenges in the pharmaceutical industry, including regulatory concerns, patent expirations and legal liability risk, have led to lower valuations for most drug companies. We believe Sanofi-Aventis is an attractive investment opportunity at a valuation of 3.3 times sales. The company has a broad product portfolio, conservative balance sheet, strong free cash flow, and a management team which has worked together for 20 years with a commitment to long-term shareholders.
Vodafone: Based in London, Vodafone is the world's largest mobile phone service provider with over 130 million customers in over 26 countries. When the market peaked in March of 2000, Vodafone sported a staggering price-to-sales (p/s) ratio of 16 times and a market capitalization of $341 billion. Vodafone now has a more reasonable p/s ratio of 2.2 times and a market capitalization of $149 billion. Growth has slowed as the market has matured. Regulatory and technological risks for the company are real, but we believe management is taking active steps to address their challenges. The stock's lower valuation may mean the downside risk for the investment is more limited than it once was.
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As one of our senior associates once said, "as the price of a company's stock changes, you change the way you speak about it as an investment." The latest example: during the first quarter we sold the Fund's position in Rio Tinto. Rio Tinto continues to be one of the world's premier mining companies, but the stock's valuation (4 times annual company sales) has risen considerably since we initiated the position in 1998, and now incorporates high expectations for future profitability. This specific change, along with others, is reflected on a portfolio level: in early 1999, 25% of the portfolio was invested in Energy and Materials stocks while at this quarter end the weighting was 14%.
While many Energy and Materials stock valuations have risen, many of the very large companies that led the market in the late 1990s now have more reasonable valuations. Today, the largest capitalization stocks in the S&P 500 (those with market capitalizations greater than $100 billion) have valuations that are approximately 10-15% below the S&P 500's price-to-earnings ratio. As their valuations have descended, we have begun to identify more opportunities. Examples of recent purchases or significant additions over the past eighteen months include Citigroup, Exxon Mobil, GlaxoSmithKline, Pfizer, Sanofi-Aventis, Vodafone and Wal-Mart Stores. In addition to having more reasonable valuations, these "megacaps" are multi-national entities that should benefit from growth in the developing world and from the adoption and development of new technologies to make their businesses more efficient and competitive. We highlight the following three examples to illustrate our investment approach, not because we think they are more attractive than the Fund's other holdings:
Citigroup: Based in New York, Citigroup is the largest financial institution in the U.S. and second largest worldwide in assets ($1.2 trillion). It is one of the most diversified financial services companies by business and geographic footprint. Citigroup has recently lost its historic valuation premium due in part to a host of legal and regulatory issues, concerns about whether the company is too big to manage, and negative operating leverage. We believe Citigroup is an attractive investment because of its relatively low valuation of 11 times earnings, its emerging market franchise, a strategic focus on being one of the largest distributors of financial products, and its large excess capital generation.
Sanofi-Aventis: Based in Paris, Sanofi-Aventis is the world's third largest pharmaceutical company. Challenges in the pharmaceutical industry, including regulatory concerns, patent expirations and legal liability risk, have led to lower valuations for most drug companies. We believe Sanofi-Aventis is an attractive investment opportunity at a valuation of 3.3 times sales. The company has a broad product portfolio, conservative balance sheet, strong free cash flow, and a management team which has worked together for 20 years with a commitment to long-term shareholders.
Vodafone: Based in London, Vodafone is the world's largest mobile phone service provider with over 130 million customers in over 26 countries. When the market peaked in March of 2000, Vodafone sported a staggering price-to-sales (p/s) ratio of 16 times and a market capitalization of $341 billion. Vodafone now has a more reasonable p/s ratio of 2.2 times and a market capitalization of $149 billion. Growth has slowed as the market has matured. Regulatory and technological risks for the company are real, but we believe management is taking active steps to address their challenges. The stock's lower valuation may mean the downside risk for the investment is more limited than it once was.
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