(GuruFocus, December 3, 2009) Recently, GuruFocus starts to track Investment Guru Jeremy Grantham, President of GMO LLC.
Why it takes so long? You may ask. Given the prominent influence of Grantham in the field, that is a fair question.
Better late than never, we may respond.
Seriously, we have been a fan of Grantham for quite some time. His clear-cut, disciplined, no-nonsense approach towards the fair value of markets around the global has always guided us, and should guide you too. To us, he is a sane voice in the madness of the market ups and downs.
In the latest quarterly letter entitled Just Deserts and Markets Being Silly Again, he stated that the fair market value of S&P 500 index should be around 890, some 200 below the current level and he anticipate market will pull back below the fair value sometimes in the first few months of next year. The catalyst for such a decline?
In the GMO website, they provide a page with 7-year Asset Class Return Forecasts (you have to login to access it, but registration is free. It is worth giving your name and email to them, just do it) and they periodically update the document. The latest update happened on November 25, 2009 based on the data on October 31, 2009. Based on the firm’s view, Passive US equities (large cap) as a whole is expected to return 2.4% and the small cap is expected to return 2.3%. Passive International equities are expected to return 5.7, 5.6, and 4.9%, depending on it is for large cap, small cap, or emerging market.
The bright spot is on the US High Quality equities. Passive portfolio is expected a 8.7% and GMO thinks they can add 1.8% additional value through active management, making the total annualized expected return to be 10.5%.
Despite the overvalued overall market and pending market correction, the availability of fair valued US high quality, foreign developed (EAFE) and some emerging market stocks makes Grantham and his team not cut back on equity as much as they normally would in facing a major market decline. He addresses the issue of U.S. Quality Stocks in a separate paragraph in the quarterly letter:
It has been about one month and a half since Grantham wrote his letter. The S&P 500 closed at 1099.92, also most exactly the same as it was when he wrote the letter. Yet there has been a sea change underneath. The high quality issues have strengthened and the low quality issues have retreated. The market leadership has shifted, and Grantham positioned his portfolio to take advantage.
Talking about portfolio, GuruFocus tracks his US traded stocks. As of September 30, 2009, he has $26.4 billion distributed among 823 stocks. In 3Q09 alone, he bought 156 new stocks.
First let’s take a look at his top holdings:
No. 1: Johnson & Johnson (JNJ, Financial), Weightings: 5.78% - 25,054,074 Shares
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $176.81 billion; its shares were traded at around $64.16 with a P/E ratio of 14.1 and P/S ratio of 2.7. The dividend yield of Johnson & Johnson stocks is 3.1%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 5-star.
Grantham added to his JNJ position in the quarter.
No. 2: Microsoft Corp. (MSFT, Financial), Weightings: 5.2% - 53,361,961 Shares
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 $266.32 billion; its shares were traded at around $29.83 with a P/E ratio of 18.5 and P/S ratio of 4.6. The dividend yield of Microsoft Corp. stocks is 1.8%. Microsoft Corp. had an annual average earning growth of 10% over the past 10 years.
Grantham reduced his position in MSFT slightly in the quarter.
No. 3: WalMart Stores Inc. (WMT, Financial), Weightings: 4.91% - 26,428,408 Shares
Wal-Mart Stores, Inc. is the world's largest retailer. Walmart Stores Inc. has a market cap of $209.97 billion; its shares were traded at around $54.44 with a P/E ratio of 15.5 and P/S ratio of 0.5. The dividend yield of Walmart Stores Inc. stocks is 2%. Walmart Stores Inc. had an annual average earning growth of 13.3% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
Grantham added to his position slightly to WMT.
No. 4: The CocaCola Company (KO, Financial), Weightings: 4.43% - 21,793,330 Shares
The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. The Cocacola Company has a market cap of $132.72 billion; its shares were traded at around $57.27 with a P/E ratio of 19 and P/S ratio of 4.2. The dividend yield of The Cocacola Company stocks is 2.9%. The Cocacola Company had an annual average earning growth of 5.3% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 2.5-star.
Grantham reduced his KO position slightly.
No. 5: Pfizer Inc (PFE, Financial), Weightings: 4.43% - 70,648,037 Shares
Pfizer Inc is a research-based, global pharmaceutical company. Pfizer Inc has a market cap of $125.8 billion; its shares were traded at around $18.64 with a P/E ratio of 8.5 and P/S ratio of 2.6. The dividend yield of Pfizer Inc stocks is 3.4%. Pfizer Inc had an annual average earning growth of 11% over the past 10 years.
Grantham reduced his position in KO slightly.
No. 6: Oracle Corp. (ORCL, Financial), Weightings: 4.33% - 54,840,037 Shares
Oracle Corporation is one of the world's leading suppliers of software for information management. Oracle Corp. has a market cap of $113.5 billion; its shares were traded at around $22.64 with a P/E ratio of 16.2 and P/S ratio of 4.9. The dividend yield of Oracle Corp. stocks is 0.9%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
Grantham kept his position virtually unchanged for the quarter.
Conclusion
Grantham’s top holdings account for far more asset as his 800+ stock portfolio suggests. Also, have you ever wondered what does he mean by “High Quality”? I have not found a literature in which he defines what the term mean.
Perhaps the high predictability that GuruFocus gives to these stocks gave you a hint?
For a list of high predictable companies, click here.
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.
Why it takes so long? You may ask. Given the prominent influence of Grantham in the field, that is a fair question.
Better late than never, we may respond.
Seriously, we have been a fan of Grantham for quite some time. His clear-cut, disciplined, no-nonsense approach towards the fair value of markets around the global has always guided us, and should guide you too. To us, he is a sane voice in the madness of the market ups and downs.
In the latest quarterly letter entitled Just Deserts and Markets Being Silly Again, he stated that the fair market value of S&P 500 index should be around 890, some 200 below the current level and he anticipate market will pull back below the fair value sometimes in the first few months of next year. The catalyst for such a decline?
“First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profi t margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as U.S. stocks reach +30-35% overpricing in the face of an extended difficult environment.” – Page 5 of the Quarterly letter.
In the GMO website, they provide a page with 7-year Asset Class Return Forecasts (you have to login to access it, but registration is free. It is worth giving your name and email to them, just do it) and they periodically update the document. The latest update happened on November 25, 2009 based on the data on October 31, 2009. Based on the firm’s view, Passive US equities (large cap) as a whole is expected to return 2.4% and the small cap is expected to return 2.3%. Passive International equities are expected to return 5.7, 5.6, and 4.9%, depending on it is for large cap, small cap, or emerging market.
The bright spot is on the US High Quality equities. Passive portfolio is expected a 8.7% and GMO thinks they can add 1.8% additional value through active management, making the total annualized expected return to be 10.5%.
Despite the overvalued overall market and pending market correction, the availability of fair valued US high quality, foreign developed (EAFE) and some emerging market stocks makes Grantham and his team not cut back on equity as much as they normally would in facing a major market decline. He addresses the issue of U.S. Quality Stocks in a separate paragraph in the quarterly letter:
Our main argument is quantitative. Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one. In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.
In addition, there are qualitative arguments. We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s. The problems of reducing debt and the potential share dilution that can go with it as it did in Japan for a decade, particularly play to the strength of the largely debt-free high-quality companies. And for nervous investors there is yet another reason for favoring quality stocks: their more than 50% foreign earnings component, which is higher than the balance of the S&P500 with its heavy financial component. In the long run, quality stocks have proven to be the one free lunch: you simply have not had to pay for the privilege of owning the great safe companies, as plain logic and established theory would both suggest. Exhibit 2 shows that quality stocks have slightly outperformed the market for the last 40 years. Not bad. – Page 6-7
It has been about one month and a half since Grantham wrote his letter. The S&P 500 closed at 1099.92, also most exactly the same as it was when he wrote the letter. Yet there has been a sea change underneath. The high quality issues have strengthened and the low quality issues have retreated. The market leadership has shifted, and Grantham positioned his portfolio to take advantage.
Talking about portfolio, GuruFocus tracks his US traded stocks. As of September 30, 2009, he has $26.4 billion distributed among 823 stocks. In 3Q09 alone, he bought 156 new stocks.
First let’s take a look at his top holdings:
No. 1: Johnson & Johnson (JNJ, Financial), Weightings: 5.78% - 25,054,074 Shares
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $176.81 billion; its shares were traded at around $64.16 with a P/E ratio of 14.1 and P/S ratio of 2.7. The dividend yield of Johnson & Johnson stocks is 3.1%. Johnson & Johnson had an annual average earning growth of 12.5% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 5-star.
Grantham added to his JNJ position in the quarter.
No. 2: Microsoft Corp. (MSFT, Financial), Weightings: 5.2% - 53,361,961 Shares
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 $266.32 billion; its shares were traded at around $29.83 with a P/E ratio of 18.5 and P/S ratio of 4.6. The dividend yield of Microsoft Corp. stocks is 1.8%. Microsoft Corp. had an annual average earning growth of 10% over the past 10 years.
Grantham reduced his position in MSFT slightly in the quarter.
No. 3: WalMart Stores Inc. (WMT, Financial), Weightings: 4.91% - 26,428,408 Shares
Wal-Mart Stores, Inc. is the world's largest retailer. Walmart Stores Inc. has a market cap of $209.97 billion; its shares were traded at around $54.44 with a P/E ratio of 15.5 and P/S ratio of 0.5. The dividend yield of Walmart Stores Inc. stocks is 2%. Walmart Stores Inc. had an annual average earning growth of 13.3% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
Grantham added to his position slightly to WMT.
No. 4: The CocaCola Company (KO, Financial), Weightings: 4.43% - 21,793,330 Shares
The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. The Cocacola Company has a market cap of $132.72 billion; its shares were traded at around $57.27 with a P/E ratio of 19 and P/S ratio of 4.2. The dividend yield of The Cocacola Company stocks is 2.9%. The Cocacola Company had an annual average earning growth of 5.3% over the past 10 years. GuruFocus rated The Cocacola Company the business predictability rank of 2.5-star.
Grantham reduced his KO position slightly.
No. 5: Pfizer Inc (PFE, Financial), Weightings: 4.43% - 70,648,037 Shares
Pfizer Inc is a research-based, global pharmaceutical company. Pfizer Inc has a market cap of $125.8 billion; its shares were traded at around $18.64 with a P/E ratio of 8.5 and P/S ratio of 2.6. The dividend yield of Pfizer Inc stocks is 3.4%. Pfizer Inc had an annual average earning growth of 11% over the past 10 years.
Grantham reduced his position in KO slightly.
No. 6: Oracle Corp. (ORCL, Financial), Weightings: 4.33% - 54,840,037 Shares
Oracle Corporation is one of the world's leading suppliers of software for information management. Oracle Corp. has a market cap of $113.5 billion; its shares were traded at around $22.64 with a P/E ratio of 16.2 and P/S ratio of 4.9. The dividend yield of Oracle Corp. stocks is 0.9%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
Grantham kept his position virtually unchanged for the quarter.
Conclusion
Grantham’s top holdings account for far more asset as his 800+ stock portfolio suggests. Also, have you ever wondered what does he mean by “High Quality”? I have not found a literature in which he defines what the term mean.
Perhaps the high predictability that GuruFocus gives to these stocks gave you a hint?
For a list of high predictable companies, click here.
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.
