Top-performing fund managers Kyle Bass, Warren Buffett and Donald Yacktman have all devised a personal approach to investing, but they each have one thing in common: They have moved significant portions of their assets under management into consumer stocks. Kyle Bass’ most-represented sector in his portfolio is consumer cyclical, Yacktman’s is consumer defensive and Warren Buffett’s second biggest is consumer defensive.
Consumer stocks are companies that make products that people use frequently and cannot do without, such as food, pharmaceuticals or utilities. Though never showing spectacular growth, “defensive” stocks show consistent earnings and dividends through the best and worst of times. Hence, investors are likely to head for this sector when they sense economic turbulence ahead. But these stocks also won’t see corresponding huge earnings gains in the event of an economic recovery. Buffett and Yacktman favor this type.
Defensive stocks are the opposite of cyclical stocks – stocks that will likely benefit from an economic upsurge. These companies usually sell products consumers can do without if necessary, but will purchase when they have extra cash and feel optimistic about the economy. Kyle Bass feels more bullish about consumer cyclical stocks.
Buffett believes in buying good companies at fair prices and holding forever. His top consumer defensive stock pick is Coca-Cola (NYSE:KO), followed by second and third choices Procter & Gamble Co. (NYSE:PG) and Wal-Mart Stores Inc. (NYSE:WMT). Coca-Cola has been in his portfolio through decades’ worth of market ups and downs. Though not a fast grower – the company gained 91% over the past 10 years – the maker of the globally beloved beverage had consistent long-term performance, pricing power and ever-increasing global consumption rates.
Buffett’s long-term view made it highly profitable for him. Since his purchase, he has made approximately $9.2 billion on the stock, or a 766% gain through 2010, according to the AP.
Coke’s performance over the shorter term has missed the rally of the broader market, with its stock up 8.9% compared to 10.7% for the S&P500 over the past year.
Procter & Gamble, which comprises 4.8% of Buffett’s portfolio, is an even slower grower. As the world’s largest and most profitable consumer products company, its stock has gained 73% over the past decade and grown revenue, EBITDA and free cash flow in the single digits on average annually in the same span, while growing its book value by 17.4% on average annually.
Shares of the company over the past year have outperformed the S&P with a 16% increase, likely due to the interference of Pershing Square Guru Bill Ackman, who poured $1.8 billion into the company last July. Prior to his involvement, the stock had remained in a two-year holding pattern.
On Jan. 25, Procter & Gamble reported a year-over-year 2% increase in net sales to $22.2 billion, and a 138% increase in net earnings to $4.08 billion, for fourth quarter 2012. It also saw gross margins increased to 50.9% from 50.1%, increased its dividend 7% to $0.562 per share from $0.525 per share and decreased its share count by 7%.
Buffett has actually been reducing his shareholding of Procter & Gamble since at least the fourth quarter of 2008, while putting money into another consumer defensive stock, Wal-Mart.
Donald Yacktman, of Yacktman Asset Management, appointed 37% of his portfolio to the consumer defensive sector, the most represented. The long-term holder has owned shares of his largest consumer defensive stock, Procter & Gamble, since 2008. He has been adding to the holding every quarter since 2009.
His second stock is also a beverage stock – PepsiCo Inc. (NYSE:PEP). He owns over 23 million shares of the company and his investment predates 2008.
PepsiCo stock has gained 104% over the past decade and outperformed the S&P by a wide margin over the past year, gaining 18.8% compared to the index’s 11%. Its financial growth has outpaced Procter & Gamble, as well. Over the past decade, its grew revenue 12.3%, EBITDA 9.5%, free cash flow 7.8% and book value 7.8%, on average each year.
Yacktman addressed cyclicality regarding Pepsi and Proctor & Gamble in his interview with GuruFocus last year:
“We believe that companies that have low capital intensity and low cyclicality like Coke (KO) Pepsi (PEP), or Proctor & Gamble (NYSE:PG) have the ability to earn some of the highest returns. What you’re looking for is both the low asset requirements and low cyclicality. It is at its best when a company sells a disposable product or a recurring service. We also like to see a large market share.”
In a September 2012 CNBC interview, he went as far as to say that “cola is a no-growth business” and that most of the company’s growth would come from Frito Lay in the future.
Kyle Bass of Hayman Capital Management has a shorter-term focus as evidenced by his 85% quarter-over-quarter portfolio turnover rate and emphasis on consumer cyclical stocks. He has a 24.7% preponderance of his super-concentrated portfolio of 13 stocks in the economically sensitive consumer cyclical sector, suggesting he was anticipating an upsurge in the market.
Bass’ largest position in the sector, Tempur-Pedic International Inc. (NYSE:TPX) is a $2.78 billion market cap mattress and pillow company with a presence in 80 countries. The international exposure is consistent with Bass’ admonition in a CNBC interview this week to own productive assets such as global businesses that sells things in different currencies to protect against inflation he sees looming.
Bass purchased 660,000 shares of the company for $29 per share on average in the fourth quarter, or 1.1% of the shares outstanding. His purchase came just before the company completed the $1.3 billion acquisition of Sealy Corporation, another mattress company, on March 18. Combined, the two have formed the world’s largest bedding provider and will change its name to Tempur Sealy International Inc. Its footprint will extend to North America, South America, Europe, Asia and Australia.
Bass has also placed 7.9% of his stock portfolio into consumer cyclical company Hyatt Hotels Corp. (NYSE:H), a position he began in the third quarter and increased in the fourth quarter. The company’s stock gained 8% so far this year.
Hyatt also focuses on international growth, particularly in emerging markets such as China and India. At year-end, it had opened or was developing 50 Hyatt hotels in China and 50 in India. It is also branching out to Chile, Colombia, Austria, Russia, Netherlands and Abu Dhabi. The company derived about 20% of its revenues from operations outside the U.S. in 2012 and expects that number to increase, according to its 10-K.
Business at Hyatt’s hotels has been good recently, with occupancy near historically high levels and revenue increasing 7% in 2012 to $3.95 billion compared to 2011. Net income slipped 22% to $87 million in the same period.
See more of Warren Buffett’s portfolio here, Donald Yacktman’s here and Kyle Bass’ here.
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