It has been well-known that Jeremy Grantham thinks the US stock market as a whole is over- valued and offers subpar return potential for the next 7 years. However, high quality stocks as a group is an exception and presents good investment value. In the his 2Q10 Letter (a copy of which is attached at the end of this writing), Jeremy Grantham attempted to answered the question of “Why Are Quality Stocks Cheap?”
So what are the stocks that Jeremy Grantham knows that is cheap and keeps buying? For the past two quarters (1Q and 2Q of 2010), these are the lucky ones?
No. 1: Google Inc. (GOOG, Financial), Weightings: 3.92% - 1,788,582 Shares
Jeremy Grantham owns 1,788,582 shares of GOOG, valued as $796 million as of Jun. 30, 2010, which accounts for 3.92% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 0.29%, again in the Jun. 30, 2010 quarter by 14.92%.
Google is a public and profitable company focused on search services. Google Inc. has a market cap of $143.1 billion; its shares were traded at around $450.02 with a P/E ratio of 19.6 and P/S ratio of 6.1. Google Inc. had an annual average earning growth of 65.7% over the past 10 years.
No. 2: Apple Inc. (AAPL, Financial), Weightings: 3.38% - 2,735,228 Shares
Jeremy Grantham owns 2,735,228 shares of AAPL, valued as $688 million as of Jun. 30, 2010, which accounts for 3.38% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 20.65%, again in the Jun. 30, 2010 quarter by 0.56%.
Apple Computer, Inc. designs, manufactures and markets personal computers and related personal computing and communicating solutions for sale primarily to education, creative, consumer, and business customers. Apple Inc. has a market cap of $221.21 billion; its shares were traded at around $243.1 with a P/E ratio of 18.3 and P/S ratio of 5.1. Apple Inc. had an annual average earning growth of 83.1% over the past 5 years.
No. 3: Abbott Laboratories (ABT, Financial), Weightings: 2.64% - 11,454,659 Shares
Jeremy Grantham owns 11,454,659 shares of ABT, valued as $536 million as of Jun. 30, 2010, which accounts for 2.64% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 2.98%, again in the Jun. 30, 2010 quarter by 1.3%.
Abbott Laboratories is a global, broad-based health care company devoted to discovering new medicines, new technologies and new ways to manage health. Abbott Laboratories has a market cap of $76.16 billion; its shares were traded at around $49.34 with a P/E ratio of 12.6 and P/S ratio of 2.5. The dividend yield of Abbott Laboratories stocks is 3.6%. Abbott Laboratories had an annual average earning growth of 7.3% over the past 10 years. GuruFocus rated Abbott Laboratories the business predictability rank of 4.5-star.
No. 4: Microsoft Corp. (MSFT, Financial), Weightings: 1.49% - 56,642,182 Shares
Jeremy Grantham owns 56,642,182 shares of MSFT, valued as $303 million as of Jun. 30, 2010, which accounts for 1.49% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 1.53%, again in the Jun. 30, 2010 quarter by 7.04%.
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 $205.64 billion; its shares were traded at around $23.465 with a P/E ratio of 11.2 and P/S ratio of 3.3. The dividend yield of Microsoft Corp. stocks is 2.2%. Microsoft Corp. had an annual average earning growth of 12.6% over the past 10 years. GuruFocus rated Microsoft Corp. the business predictability rank of 3-star.
No. 5: NIKE Inc. (NKE, Financial), Weightings: 1.18% - 3,538,393 Shares
Jeremy Grantham owns 3,538,393 shares of NKE, valued as $239 million as of Jun. 30, 2010, which accounts for 1.18% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 1.31%, again in the Jun. 30, 2010 quarter by 4.1%.
Nike, Inc.'s principal business activity involves the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. Nike Inc. has a market cap of $34 billion; its shares were traded at around $70 with a P/E ratio of 18 and P/S ratio of 1.8. The dividend yield of Nike Inc. stocks is 1.5%. Nike Inc. had an annual average earning growth of 13.2% over the past 10 years. GuruFocus rated Nike Inc. the business predictability rank of 4.5-star.
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JeremyGranthamQ2Letter
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High quality stocks were left very much behind in the great rally last year, which was the biggest and most speculative since 1932. Much more surprisingly, they have underperformed this year, probably for the reasons discussed above. But unlike small caps, they have been cheap for almost five years and, given the uncertainties around today, this is unusual. There are surely additional reasons, other than the low rates, why the great companies have persistently sold at a discount. Why didn’t quality stocks at least become expensive, and risky stocks become cheap on a relative basis, when we were at the deepest point in the crisis? Most risky fi xed income securities certainly became very cheap then. I understand the general direction of the performance of quality stocks: down in 2005, 2006, and 2007, which were speculative years; up a lot in 2008, which was the year of anti-risk panic; and down in 2009 and 2010, which were also very speculative. But, I’m puzzled by the general value level around which they have been moving. It’s as if there is an extra and unusual force working against them. This type of mispricing always has a reason. It may not be particularly rational, but there is a reason. Let me confess that I have no certain answer, but I’ll offer a couple of candidates.
One is the population profile: there are more new retirees per new worker than there used to be. Retirees are selling stocks to pay the bills and to buy more conservative fixed income investments. And what stocks are they selling? By the time they retire, they probably own blue chips, having sold down most of their speculative stocks in the decade before retirement. This is just a guess; I have no good data to prove it. But it does seem reasonable.
A second candidate, accompanied by stronger circumstantial evidence, is the “Let’s all look like Yale” syndrome. In the last 10 years, institutions and even ultra-rich individuals have, in general, been increasing the share of their portfolios that is invested in private equity and hedge funds, commodities, and real estate. And even within their equities, they have been increasing their share of foreign equities, including emerging markets and small caps. At the second derivative level, hedge funds may feel that they do not get paid to buy Coca-Cola, and private equity firms, particularly now, do not go after many of the great franchise companies. So what is being liquidated to buy all of this new stuff? Old-fashioned blue chip U.S. stocks and U.S. government bonds that used to completely dominate even sophisticated institutional accounts and now no longer do. In the case of U.S. bonds, we have the noble Chinese to step into the breach for a powerful reason: they have no alternative if they want to run trade surpluses. But blue chip stocks are on their own, without any natural offsetting buyers.
In a rational market, structural selling pressures that are not related to long-term value will create a modest mispricing opportunity into which sensible money will be drawn. That would be a nice, boring world to live in. In ours, where herding dominates and an extreme libertarian like Greenspan or a painfully academic academic like Bernanke are the shepherds, the inefficiencies can be much greater than in Fama’s and French’s wildest dreams. And so it is today. The next time – at some unknowable point in the future – when relative prices for quality versus the rest of the market once more cross through fair value (as the market in aggregate did in October 2008 and June 2009, by the way), the excess return for quality could be over 40 percentage points! (This is reflected in our seven-year forecasted difference of 7.3% for high quality and 1.1% for the rest of the S&P 500, compounded over seven years as of June 30.) Incidentally, although it is interesting to wonder why certain stocks or groups become cheap, there are no points for getting the reasons right. There are only points for knowing what actually is cheap and owning it.
Supply-demand issues like the two described can be powerful in distorting prices in the short run and even the quite long run, but it is like holding a ping pong ball under water: it needs constant pressure to keep it there. Remove the pressure even for a short while and the normal equilibrium will quickly be restored. In this way, quality stocks might possibly spend much of the next several years underpriced, but from time to time will bounce back to fair value. This is all that patient investors need. It is the converse of the market pattern of the last 20 years: mostly overpriced, but occasionally spiking down to fair value.
So what are the stocks that Jeremy Grantham knows that is cheap and keeps buying? For the past two quarters (1Q and 2Q of 2010), these are the lucky ones?
No. 1: Google Inc. (GOOG, Financial), Weightings: 3.92% - 1,788,582 Shares
Jeremy Grantham owns 1,788,582 shares of GOOG, valued as $796 million as of Jun. 30, 2010, which accounts for 3.92% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 0.29%, again in the Jun. 30, 2010 quarter by 14.92%.
Google is a public and profitable company focused on search services. Google Inc. has a market cap of $143.1 billion; its shares were traded at around $450.02 with a P/E ratio of 19.6 and P/S ratio of 6.1. Google Inc. had an annual average earning growth of 65.7% over the past 10 years.
No. 2: Apple Inc. (AAPL, Financial), Weightings: 3.38% - 2,735,228 Shares
Jeremy Grantham owns 2,735,228 shares of AAPL, valued as $688 million as of Jun. 30, 2010, which accounts for 3.38% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 20.65%, again in the Jun. 30, 2010 quarter by 0.56%.
Apple Computer, Inc. designs, manufactures and markets personal computers and related personal computing and communicating solutions for sale primarily to education, creative, consumer, and business customers. Apple Inc. has a market cap of $221.21 billion; its shares were traded at around $243.1 with a P/E ratio of 18.3 and P/S ratio of 5.1. Apple Inc. had an annual average earning growth of 83.1% over the past 5 years.
No. 3: Abbott Laboratories (ABT, Financial), Weightings: 2.64% - 11,454,659 Shares
Jeremy Grantham owns 11,454,659 shares of ABT, valued as $536 million as of Jun. 30, 2010, which accounts for 2.64% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 2.98%, again in the Jun. 30, 2010 quarter by 1.3%.
Abbott Laboratories is a global, broad-based health care company devoted to discovering new medicines, new technologies and new ways to manage health. Abbott Laboratories has a market cap of $76.16 billion; its shares were traded at around $49.34 with a P/E ratio of 12.6 and P/S ratio of 2.5. The dividend yield of Abbott Laboratories stocks is 3.6%. Abbott Laboratories had an annual average earning growth of 7.3% over the past 10 years. GuruFocus rated Abbott Laboratories the business predictability rank of 4.5-star.
No. 4: Microsoft Corp. (MSFT, Financial), Weightings: 1.49% - 56,642,182 Shares
Jeremy Grantham owns 56,642,182 shares of MSFT, valued as $303 million as of Jun. 30, 2010, which accounts for 1.49% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 1.53%, again in the Jun. 30, 2010 quarter by 7.04%.
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 $205.64 billion; its shares were traded at around $23.465 with a P/E ratio of 11.2 and P/S ratio of 3.3. The dividend yield of Microsoft Corp. stocks is 2.2%. Microsoft Corp. had an annual average earning growth of 12.6% over the past 10 years. GuruFocus rated Microsoft Corp. the business predictability rank of 3-star.
No. 5: NIKE Inc. (NKE, Financial), Weightings: 1.18% - 3,538,393 Shares
Jeremy Grantham owns 3,538,393 shares of NKE, valued as $239 million as of Jun. 30, 2010, which accounts for 1.18% of his equity portfolio. Jeremy Grantham added his positions in the Mar. 31, 2010 quarter by 1.31%, again in the Jun. 30, 2010 quarter by 4.1%.
Nike, Inc.'s principal business activity involves the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. Nike Inc. has a market cap of $34 billion; its shares were traded at around $70 with a P/E ratio of 18 and P/S ratio of 1.8. The dividend yield of Nike Inc. stocks is 1.5%. Nike Inc. had an annual average earning growth of 13.2% over the past 10 years. GuruFocus rated Nike Inc. the business predictability rank of 4.5-star.
To check the complete list of of Jeremy Grantham, please go to http://www.gurufocus.com/holdings.php?GuruName=Jeremy+Grantham
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.
JeremyGranthamQ2Letter
The letter originally appeared in http://www.gmo.com. A free registration is required. It is definitely worth the registration as the firm from time to time publishes insightful investment papers.
Also check out:
