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Donald Yacktman Publishes 1Q11 Letter

April 28, 2011
Donald Yacktman published his 1Q11 letter. For the quarter, The Yacktman Focused Fund and The Yacktman Fund appreciated 5.60% and 5.80% compared to the S&P 500 which was up 5.92%. But as Yacktman showed in the letter, over the course of the past 10 years, his funds beat the benchmark significantly.

In the past two years or so, Yacktman has gone back to the high-quality blue chips stock in the media, consumer staples, healthcare, and more recently in “old tech” companies. Here is what he said about these sectors:

Among the biggest contributors to performance in the first quarter were media stocks. News Corporation, our largest holding in each fund, was up more than 20% for the quarter, while Viacom and Comcast returned more than 10% each. All three companies still sell at low multiples of free cash flow and continue to be attractive investments.

Consumer Staples

Consumer staples shares generally lagged the market rally of the first quarter. Our largest staples positions are PepsiCo, Procter & Gamble, and Coca-Cola. During the quarter, PepsiCo and Coca-Cola were slightly positive while Procter & Gamble was down modestly.

In the last two years as the overall market recovered, many consumer staples stocks have significantly underperformed the shares of more cyclical or commodity-oriented businesses. Current valuations for the consumer staple positions we hold are extremely attractive, especially given the low level of business risk we believe these franchises have.


We own significant positions in several pharmaceutical and medical device companies which we think are mispriced due to concerns about upcoming changes to the healthcare system in the United States. Last quarter, Pfizer, C.R. Bard, Stryker, and Covidien produced solid returns while Johnson & Johnson and Becton Dickinson declined modestly.

“Old Tech” – Down, But Not Down For The Count

Last quarter, Microsoft, HP, and Cisco all declined. In the last 12 months, Microsoft, HP, and Cisco are all down even though the S&P 500 is up more than 15%. We used the declines in these stocks to increase our weighting to this group of companies and add a small position in Intel in The Yacktman Fund only. We refer to this group of four companies as “old tech”.

Investing is largely about what you buy and what you pay for it. Today, with the “old tech” positions in the funds, we think we are getting good businesses at fire sale prices. A little more than a decade ago, these same stocks were overvalued, causing the returns for many previous shareholders to be poor even though the businesses produced strong results.

Today, this “old tech” group is now so disliked it sells at less than ½ the multiple of the S&P 500 even though the companies in this group exhibit business characteristics that we believe are superior to the average company in the S&P 500. The “old tech” balance sheets are some of the strongest around.

More recently, since 2007, the underlying businesses of our “old tech” basket have performed well and vastly outperformed the S&P 500, yet the stocks have dramatically underperformed. Each of the four companies in our “old tech” basket sells at less than 10 times our projection of 2011 earnings, net of the cash on the balance sheet. As long as the businesses on average do not go into unpredicted, sudden, and rapid decline, our investments should do well over time.

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