So which names are pro investors piling into? And which still make sense to buy today? Today, we'll answer both of those questions by peeking at the latest round of 13F filings.
What's a 13F anyway?
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, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, approximately 3,800 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with pro investors' $20.5 trillion under management.
Today, we'll focus on hedge funds' five favorite consumer stocks.
No other consumer staple saw as much cash thrown at it by hedge fund managers as Coca-Cola (KO) did last quarter. Fund managers picked up 20.46 million more shares of the beverage behemoth, an $854 million bet at current price levels.
Despite Coke's huge size, it's not hard to see why investors are seeing exciting opportunities at the world's biggest beverage maker. Strategic investments in growth names such as Keurig Green Mountain (GMCR) and Monster Beverage Corp. (MNST) make Coke a whole lot more interesting right now.
Coke owns some of the most successful beverage brands in the business: in addition to its huge namesake label, the firm owns names like Sprite, Dasani, Fanta and Powerade. The firm gets those drinks into consumers' hands through a distribution network that spans more than 200 countries and keeps per-unit costs extremely low. The firm's international exposure is significant; today, 80 cents out of every sales dollar at Coke comes from overseas.
Even though Coca-Cola's business isn't changing fundamentally thanks to the GMCR or MNST deals, both arrangements do have the potential to move the needle materially at KO's business. Perhaps more importantly, those investments signal to investors that Coke isn't about to rest on its scale laurels any time soon. For investors in search of exposure to the consumer staples sector, it's hard to beat a name like Coke.
Tobacco leader Altria Group (MO) provides a nice contrast to Coca-Cola's squeaky-clean image with consumers. Altria is the prototypical "sin stock": The firm's business is built around cigarettes, cigars, beer and wine. And pro investors love this stock right now; all told, funds picked up another 14.17 million shares of Altria in the last quarter. Between that buying and price appreciation, hedge funds' stakes in MO were boosted by more than 10% over the course of the second quarter.
Altria is the largest tobacco company in the U.S., led by its crown jewel Marlboro brand. Altria’s other businesses include cigars and smokeless tobacco, Ste. Michelle Wine Estates and a massive 27.1% stake in SABMiller (SBMRY) . Despite the business case for selling an addictive product, Altria's sales are facing a slow decline. That's because the firm spun off its growth focused international business into Philip Morris International (PM) back in 2008, leaving MO with the mature (but declining) U.S. tobacco business. The key word is that demand is dying "slowly"; cigarette volumes should see slips in the mid-single digits for the next few years. And that means that MO should continue to perform financially.
Investments in alcohol mitigate the downward trajectory of the legacy tobacco business, as does exposure to e-cigarettes, which have been gaining in popularity among smokers in recent years. The fact that Altria's SABMiler stake contributes around $12 per share to the firm's price tag adds some big risk mitigation.
From a financial standpoint, a huge draw to MO is the large dividend payout that the firm pays out -- a 4.8% yield at current levels. For income investors, MO still looks very attractive in the second half of 2014.
Drugstore chain Walgreen (WAG) is another consumer stock that funds piled into last quarter. Walgreen is in store for some big changes in the year ahead. The firm's decision to buy the remaining 55% of European chain Alliance Boots will greatly increase its exposure abroad, taking some of the focus away from U.S. operations, where competition and pressure from insurers are squeezing margins for pharmaceutical retailers.
Meanwhile, Walgreen's size advantages here at home remain. The firm is the largest drugstore chain in the country, with more than 8,600 locations from coast to coast, and that network effect means that the firm can reach more Americans than its peers can. Even though margins are under pressure on the pharmaceutical side of the business, an aging population should help to drive overall drug volumes for WAG and its peers, providing a rising tide that should lift all ships in the years ahead.
Likewise, the firm has been working to differentiate away from its core business, adding in-store clinics that provide high-margin revenues. Funds picked up 11.46 million shares of Walgreen last quarter, a $690 million buying spree at current price levels. There's no question that WAG is a staid consumer staple name, but growing business complexity and a complete lack of momentum in 2014 make it the least appealing name on hedge funds' buy list.
Mead Johnson Nutrition
Mead Johnson Nutrition (MJN) is having a solid year in 2014. Since the calendar flipped to January, this children's nutrition stock is up more than 12%. That's half again the return that the S&P 500 has paid out to investors over the same stretch. That strong performance comes courtesy of a model that produces deep margins and sticky sales. Put simply, baby formula is big business at MJN.
Enfamil is Mead Johnson's flagship brand, and it's entrenched in the baby food niche. When it comes to infant nutrition, new parents don't tend to take chances. Instead, they're happy to pay premium prices for high quality, well-known labels. Likewise, those premium brands are typically also covered by programs like WIC, which let lower-income families buy Enfamil without watching the price of formula. Mead Johnson's U.S. exposure is really just a footnote, though. The firm earns around 70% of its sales in Asia and Latin America, a pair of high-growth markets with large middle class populations.
From a financial standpoint, MJN is in good shape. The firm's $2 billion debt load is largely offset by a $1.6 billion cash position on its balance sheet. A history of net margins above 15% means that Mead Johnson is able to convert a big chunk of every sales dollar into cash, and that's keeping funds happy. Last quarter, hedge funds added 1.49 million shares of MJN to their portfolios.
Last up on hedge funds' buy list is Energizer Holdings (ENR) , the $7.5 billion battery maker. Funds bought into strength last quarter, adding 1 million shares of ENR to their portfolios as shares rallied double-digits. Now, the question is whether ENR's price will perform like its rabbit mascot and keep going and going higher.
Don't let the name fool you. Energizer Holdings is about much more than its namesake battery brand. The firm also owns a collection of other consumer products businesses that includes Schick, Playtex, Hawaiian Tropic and Skintimate. Energizer's battery business has come under attack in recent years, as more devices have been released with integrated proprietary batteries, rendering the old "batteries not included" disclaimer unnecessary. That said, there's still an abundance of household items that do require conventional batteries, and ENR's No. 2 spot in the household battery business gives it significant earning power. The increasing exposure to industrial and specialty batteries is helping to offset the losses on the household battery side of the business.
Energizer's announcement earlier this year to split into two publicly traded companies should come as welcome news for investors. By splitting up household products and personal care items, ENR should be able to unlock extra value for shareholders while at the same time separating units that have little overlap between them. Look for ENR to continue its growth trajectory in 2014.
To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.