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Jeremy Grantham's 3 Top Picks of the Quarter

The prescient investor chose Shake Shack, a South Korean equity index and an aerospace company about to become part of Northrop Grumman

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Yamil Berard
Feb 20, 2018
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Legendary value investor

Jeremy Grantham (Trades, Portfolio) has disclosed his three largest stock picks for the final months of the year.

Grantham bought shares of Orbital ATK Inc. (

OA, Financial), an aerospace company that has been acquired by aerospace systems giant Northrop Grumman Corp. (NOC, Financial).

Grumman, whose stock this week reached a 52-week high of $356 a share, announced in September plans to buy Orbital for $9.2 billion. The European Commission authorized the union just this week.

Grantham‘s second stock pick is Shake Shack (

SHAK, Financial), a fast-casual restaurant chain that began as a food cart inside Madison Square Park in 2004.

The guru’s third new position is in iShares Inc. MSCI South Korea (

EWY, Financial), an index exposed to equities in South Korea.

Of 757 stocks in all, 109 are new to the $17 billion portfolio of Grantham’s asset management firm Grantham, Mayo, Van Otterloo & Co.

His portfolio has a 9% turnover rate from the previous quarter of the year. More than 35% of the portfolio is in technology; 17.1% health care; 11.8% financial services; 11.4% consumer cyclical, 6.3% industrials; consumer defensive, ETFs, communication services, basic materials, energy, utilities and real estate make up the remainder.

Orbital ATK

Virginia-based Orbital is releasing its fourth-quarter financial results on Feb. 22. The stock was trading at $132 a share, up .01% on Tuesday. Grantham bought nearly 232,000 shares. The stock’s fourth-quarter share price averaged $132. It takes up 0.18% of the portfolio.

Orbital has a market cap of $7.62 billion. It has a price-earnings ratio of 24.35 and a price-sales ratio of 1.63. The trailing 12-month dividend yield of Orbital is 0.97%. Its revenue growth over the last 12 months is 10.40%. Prior to that, its revenue per share has been in decline.

One key warning sign is the company’s Beneish M-score implies it might have manipulated its financial results.

GuruFocus rated it a business predictability rating of one star. The rating is based, among other things, on GuruFocus rankings of 5 out of 10 in financial strength and profitability and growth.

Grumman said in September the acquisition would trigger an annual cost savings of $150 million a year by 2020. It also said it would create strong combined cash flow generation that supports financial flexibility.

Shake Shack

Grantham purchased 900,000 shares of the New York City-based company. The average price in the quarter was $38 a share. It holds 0.23% of the portfolio.

Shake Shack was down 2% on Tuesday for a share price of $37.20. It stock has surged 21% in the last six months and was at a high of over $92 a share in 2015.

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The company has a market cap of $1.36 billion and a price-sales ratio of 6.12, which is lower than 90% of its peers.

Its revenue has grown 11% over the last 12 months.

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Its earnings per share without nonrecurring items for the trailing 12 months ended Sept. 2017 was 63 cents.

A warning sign is it has a short interest of 38.40, signifying a large portion of its float is made up of short sales.

GuruFocus gives it a financial strength rating of 8 out of 10 and a profitability and growth rating of 5 of 10.

iShares Inc. MSCI South Korea

The index has a market cap of $4.2 billion. Grantham purchased 2.5 million shares for an average price of $74 a share. It represents 1.1% of the portfolio.

Gurus

David Swensen (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) also had held the stock, but sold out last year.

It has a trailing 12-month dividend of $2.50 and a dividend yield of 3.45%. Its latest pay date was Dec. 26. It pays out annually. Its historical trailing 12-month price-earnings ratio is 13.60. Its price-book ratio is 1.3%.

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