Just because you can’t do the same research a large investment management firm can, that doesn’t mean you can’t make the same trades.
The best investment management firms have vast resources that you can take advantage of to guide your own stock selections.
Finding good investment ideas is hard work. It takes time and effort to sort through the 3,500 or so relevant publicly-traded stocks in the United States, understand the business, evaluate their leadership, and assess their financials. Even then, selecting the few stocks with the most promising prospects adds further complexity. One valuable method that investors can use is to look at what the best investment management firms are buying. These fund companies have vast resources and a lot of analysts that spend their days doing all the research. When they buy a large new position, or add to an existing position, it may mean that it is time for you to buy, as well.
When shadowing investment management firms, focus on the managers with an investment approach similar to your own. You might already be familiar with some of their holdings, and you can better understand their rationale for choosing their investments. Also, look for holdings with a risk level that suits your own tolerance. Sometimes managers and investment management firms hold higher risk stocks but benefit from diversification in ways that you may not. Remember, too, that managers generally file only at quarter-end, so the precise timing of their trades can be cloudy. For most investors, this is close enough.
Listed below are three holdings of top-quality value-oriented investment management firms that have some interesting appeal:
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What are the Investment Management Firms Buying?
Liberty Sirius XM Group (LSXMA) – This company is part of the Liberty Media empire founded and led by the legendary John Malone. Liberty Sirius XM is a tracking stock, which means that holders receive the economic benefits of ownership but don’t have a direct claim on the underlying assets. Malone shuffles holdings in complex ways, but over time has produced exceptional returns for investors. The company’s primary holdings are ownership stakes in the Sirius XM satellite radio company and Live Nation Entertainment, the world’s largest live entertainment company. Shares of both of these companies also trade independently, but buying LSXMA shares allows investors to own these at a sizeable discount. While LSXMA shares have surged recently on optimistic news about a Covid vaccine, the shares remain down year-to-date. When the economy fully re-opens, both companies should benefit.
The Baupost Group (estimated $29 billion in assets) holds a large position in Liberty Sirius XM Group after adding substantially to its position recently. Notably, Berkshire Hathaway is the largest shareholder, with a 16.9% stake.
McKesson Corporation (MCK) – McKesson is the largest of the three major wholesalers that supply hospitals, retail pharmacies and other healthcare providers with the right products. It navigates the logistical complexities of buying in bulk from major manufacturers, then distributing to many thousands of customers, while maintaining acceptable profitability. With a clear and valuable niche, and high barriers to entry, these three companies are in many ways irreplaceable. Recent profitability has been pressured by the slowing growth of patented pharmaceuticals, weaker price inflation, and rising negotiating power of its customers. However, with rising demand for Covid protection gear, its role as a primary distributor of Covid vaccines, and a cheap stock at 8.5x forward earnings, McKesson’s shares have interesting value-oriented appeal. McKesson is one of the largest holdings of noted value investor Pzena Investment Management ($33 billion in assets), which recently raised its position.
Charles Schwab Corporation (SCHW) – One of the original discount brokers, Schwab has grown into a $5 trillion (assets) financial services powerhouse. The company recently acquired competitor TD Ameritrade in a $22 billion deal, providing new revenue and cost-cutting opportunities. Also, Schwab is looking to boost its growth by expanding its roster of ETFs, robo-advisory services and human-advised services. The company is well-positioned, as a new generation of traders emerge and eventually migrate from basic phone-based trading apps to more robust platforms like Schwab. While the shares have jumped in recent months, they remain below their highs due to low interest rates and intense competition, along with some controversy around the merits of the TD merger. SCHW is a top holding of Diamond Hill Capital Management ($22 billion in assets), a highly-regarded and research-intensive value investment firm, which recently added to its holdings.
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