BALTIMORE (Stockpickr) -- The government isn't exactly known for the prudent handling of money. Stories of $640 toilet seats and $37 screws come to mind. Budgeting and buying may not be Uncle Sam's strong suit, but investing is a different story.
Government investments have been conspicuous losers in recent years, like the $10.5 billion lost on the bailout of General Motors (GM) or the now-you-see-it-now-you-don't profit made on American International Group (AIG). But while those deals have grabbed headlines, they weren't actually investments; they were bailouts.
In fact, governments' investment funds are some of the most ignored big-dollar professionally managed portfolios out there. And they're not relegated to the U.S. Federal government -- individual state trusts and foreign governments' sovereign wealth funds add up to some huge assets under management.
While we can't peek into all government investment accounts, the SEC's own rules can help us get the details on eight of the biggest with U.S.-domiciled accounts.
With $47.2 billion in stocks as of the most recent quarter, it makes sense to pay attention to these government funds' favorite stocks in 2014. To do that, we'll use 13F filings.
Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies to governments, any professional investors who manage more than that $100 million watermark are required to file a 13F.
Today, well focus on five stocks government-managed funds bought most during the last quarter.
Level 3 Communications
Government-run funds really like integrated telecom firm Level 3 Communications (LVLT) -- not that it should come as any surprise. Level 3 has been a stellar performer in the last 12 months, tacking nearly 44% onto its share price over that time period. So government investors have been piling on another 450,000 shares in the most recent quarter, boosting their stake by more than $15 million at current share prices.
Level 3 is a wholesale communications provider. The firm helps enterprise and carrier customers deliver voice, IP and video and content worldwide over its tier 1 network (it's one of only six in the world). LVLT also operates the largest competitive local exchange carrier in the country. Level 3's deep Internet infrastructure should continue to generate strong demand as data consumption continues to rise globally. Likewise, the firm's scale makes it an obvious partner for major communications carriers, and it's got an impressive client list to show for it. Those clients are also incredibly sticky, since few rivals can step in and replace LVLT's infrastructure.
That said, owning valuable infrastructure is expensive. Historically, Level 3 has paid its way by carrying a very leveraged balance sheet; at last count, the firm had more than $8 billion in net debt on the books. While Level 3 has gotten close to getting itself in trouble with debt in the past, it's been making some impressive strides towards profitability in 2013. That could greatly change this stock's fortunes as we get deeper into 2014. Earnings on Feb. 5 should be telling.
While Level 3's debt load continues to be a concern, this stock is showing some promise. And government funds (Singapore's in particular) are betting big on shares right now with nearly half of the firm's outstanding shares in tow.
Take it from me -- the past five months have been strong for shareholders of tech behemoth Apple (AAPL). Shares of AAPL are up more than 21% since September. And despite the recent upside, the $491 billion device maker still looks cheap from a valuation standpoint.
Government funds agree. They picked up 678,000 shares of AAPL in the last quarter, hiking their holdings by 50%.
That brings the value of government funds' ownership in Apple to nearly $1 billion at current prices.
Apple is one of the most profitable technology manufacturers in the world. At the same time that PC makers and mobile device rivals are fighting a race to the bottom on margins to stay competitive, Apple still converts more than 20 cents on every sales dollar into profit. It's done that by establishing a deep economic moat over its ecosystem, incentivizing users to "keep it in the family" with innovative products that work well. That's borne out by usage metrics; while Apple's iOS isn't the dominant mobile operating system, for instance, it is the most used by far.
The firm's dominance has done a good job of scaring investors away. After all, how much longer can Apple's breakneck growth rates continue? But with $130 billion in net cash and investments, the firm has enough cash to retire more than 26% of its outstanding shares at current prices. Ex-cash, Apple currently trades for a paltry P/E ratio of 10.
Even if the company never experiences growth again, Apple sports a dirt-cheap price tag in 2014.
High oil prices have fueled some substantial growth in Exxon Mobil (XOM) in recent years, turning more projects economically viable and funding critical acquisitions. And as crude prices continue to sit on the high end of their historic range, Exxon should continue to throw off serious cash to investors, including government funds.
>>5 Stocks Insiders Love Right Now In the most recent quarter, government investors added 2.85 million Exxon shares to their portfolios -- a $282 million increase at current prices.
Exxon is the world's biggest oil and gas supermajor, with proven reserves of 18.2 billion barrels of oil equivalent. More than half of Exxon's reserves are oil, which means that the firm enjoys a rich sales mix that's skewed heavily towards the commodity that'll give it the most bang for its buck. The acquisition of XTO Energy in 2010 dramatically increased Exxon's natural gas exposure, and diluted net margins in exchange for overall growth. While that decision was somewhat controversial, I think it'll prove to be one of the best ways to achieve meaningful growth for investors given Exxon's previous size.
Because Exxon is an integrated oil and gas firm, it has a hand in every step of the energy business, from pulling oil out of the ground to refining it to retailing it at its gas stations. The firm's downstream operations have historically been excellent, driving much better returns than peers that have been busy spinning off their own downstream assets.
For investors looking for energy sector exposure, it's hard to go wrong with Exxon and its 2.5% dividend yield.
Johnson & Johnson
Government funds kept up with the uber-blue-chip theme last quarter, picking up 2.47 million shares of $267 billion health care name Johnson & Johnson (JNJ). That buy operation doubled the funds' exposure to JNJ, making it a significant bet on the firm.
Johnson & Johnson is the biggest health care company, best known for consumer brands such as Band-Aid, Tylenol, Neutrogena and Acuvue. But the consumer divisions are just the tip of the iceberg; Johnson & Johnson's pharmaceutical and medical device businesses make up the most important part of the income statement. That huge level of diversification is a major benefit for shareholders -- it spares investors from overblown exposure to drug patent losses, health care regulations and economic hiccups.
While the acquisition of orthopedic device firm Synthes ate up a big chunk of Johnson & Johnson's net cash, the firm's balance sheet is still pristine with around $15.5 billion in net cash on the books. Johnson & Johnson's combined health care business enjoys some massive net profit margins -- nearly 17% in the most recent quarter. Those huge profits should continue to contribute to shareholder yield: Currently, the firm pays out a 2.8% dividend yield on top of the 30% gains shares saw last year.
Last up on government funds' "buy list" is big bank Wells Fargo (WFC). The funds picked up 4.93 million shares of WFC in the last quarter, once again doubling their exposure to the stock. So should you buy it too?
Wells Fargo earned a reputation for being the best-in-breed of the big banking names during the Great Recession. The firm's businesses range from all of the conventional retail and commercial banking to wealth management, investment brokerage, and investment banking. And while Wells certainly didn't skate through the financial crisis of 2008, it managed to exit the environment bigger and stronger by buying floundering Wachovia at fire sale prices.
But while there isn't a lot to hate about Wells Fargo, there isn't a lot to be exited about either. Yard for yard, Wells Fargo isn't much different from any of the other big-four banks in the U.S. Most of the kinks have been worked out of WFC's labyrinthine balance sheet at this point, but there are some smaller banking names with bigger fee-based sales streams that look more interesting right now. BNY Mellon (BK) and U.S. Bancorp (USB) are more unique alternatives worth a closer look.
To see these stocks in action, check out the Government Investment Fund Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.