Which Stocks Are 'High-Conviction' Picks by Fund Managers?

BOSTON ( TheStreet) -- Taking advantage of equities' poor second-quarter performance, highly rated investment funds are bulking up on select stocks in three recently out-of-favor sectors: financials, technology and oil-and-gas firms, according to Morningstar.

With the S&P 500 down 3% in the second quarter after the first quarter's 12% gain, the managers of these funds apparently viewed the dip as a buying opportunity.

"We saw a marked increase in purchases during the second quarter, with plenty of new-money buys among the top 10 purchases made by our top managers during the period," said Greggory Warren, a Morningstar senior stock analyst, in a Sept. 5 note that summarized the most recent portfolio activities of 26 of his firm's top-rated investment funds that it tracks for its Ultimate Stock Pickers series.

Morningstar identifies what it calls "conviction" buys by those funds, which are either significant additions to already existing holdings of funds, or represent big new positions for the funds made during a reporting period, which in this case is the second quarter, and for some funds, the beginning of the third.

Google ( GOOG), the world's largest Internet search company, was clearly the fund managers' favorite.

"Google stood out from the rest of the pack because it is rare to see five of our Ultimate Stock-Pickers making high-conviction purchases in the same stock during any single period," said Warren, "and the fact that two of the managers that were buying shares were actually building new positions in the name demonstrates an even higher degree of conviction in the name.

"New-money purchases provide us with the most insight into what our top managers think are the most attractive buying opportunities, as portfolio managers tend to only put money to work in new names when their purchase decision carries a very high degree of conviction," Warren said.

Google, now trading at $706 and with a market value of $227 billion, generates revenue when users click or view advertising related to their searches.

Its shares are up 22% in the past three months (through Sept. 7) but only 10% this year.

Google, now held by half of the 26 Ultimate Stock-Picker funds, is a favorite with the 42 analysts that follow it as well, as they give its shares 20 "buy" ratings, 14 "buy/holds," and eight "holds," according to a survey of analysts by S&P.

Other technology favorites of the funds in the period were the computer network infrastructure provider Juniper Networks ( JNPR), which was bought by four funds, including two initiating stakes in it, and Oracle ( ORCL), the corporate hardware and software provider, which saw big buying by five funds.

Oracle's shares are up 20% over the past three months, while Juniper's continue in the doldrums, with a 9% decline on the year, although they have gained 13% in the past three months.

On the flip side of the technology buying, Juniper Network's head-on competitor, Cisco Systems ( CSCO), which was in the top 10 holdings of the Ultimate Stock-Pickers at one time or another over the past two years, suffered big selling. Four of the 11 managers that held Cisco at the end of the first quarter "sold their positions outright during the most recent period," Morningstar reported. "The networking giant doesn't even crack the top 25 holdings these days."

The financial-services sector is the Ultimate Stock-Pickers funds' heaviest sector weighting on a comparative basis, at 17% at the end of the second quarter, versus its 13% weighting in the overall market.

The big buys in the period included one of the world's largest financial-services companies, Bank of New York Mellon ( BK), the international financial conglomerate JPMorgan Chase ( JPM) and Visa ( V), a manager of credit card brands.

These companies are on a roll as Bank of New York is up 12% over the past three months, while JPMorgan is up 20%, and Visa, 11%. The S&P 500 has risen 10% in the period.

Four of the seven Ultimate Stock-Pickers funds that held the stock of Bank of New York at the end of the first quarter were buying during the most recent period, with Berkshire Hathaway ( BRK.B ) and Tweedy Browne Value ( TWEBX) both making significant additions to their holdings, Morningstar said.

Three of the five managers that held the stock of JPMorgan Chase coming into the second quarter bought more of its shares, while two other managers initiated stakes.

The oil patch was well-represented on the list of big buys, perhaps because fund managers saw the 20% tumble of world oil prices in the second quarter and the subsequent decline in oil sector share prices made some of them cheap.

Five funds were big buyers of the oil-and-gas exploration and production firms Occidental Petroleum ( OXY) and Devon Energy ( DVN), while Apache ( APA) saw four funds that already held stakes in it buy more of its stock.

But all three firms' shares are losers so far this year.

Another notable buy on the part of the investment managers, with three funds making big purchases, is Thermo Fisher Scientific ( TMO), a manufacturer of sophisticated medical and industrial laboratory equipment.

Its shares are up 16% in the past three months, and 31% on the year.

Analysts give its shares 11 "buy" ratings, five "buy/holds," and four "holds," according to a survey of analysts by S&P.

As for selling in the quarter, four of the top 10 sales were of stocks from the consumer defensive sector, which was up 2% on a total return basis from the end of March until the end of June, Morningstar said.
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