Morningstar Advisor - April/May 2013 - (Page 18)

Investments à la Carte Five Picks for the Present Stock: National Oilwell Varco NOV Fair Value Estimate $98 Morningstar Rating Uncertainty Medium QQQQQ 2012 Stock Price Compared With Fair Value Estimate Daily stock price $120K 100 Fair value estimate (Gaps indicate when fair value estimate was under review.) 80 02/12 05/12 08/12 11/12 Economic Moat Wide National Oilwell Varco is best known for its rig-equipment dominance, particularly deep-water rigs, which we see as a wide-moat business. Its equipment is on 90% of the world’s rigs, and a rig cannot be built in the Western world without using some components from the firm. The offshore rig-equipment outlook is bright in an improving deep-water Forward P/E 9.6 Market Cap $28.8 billion environment where drillers are eagerly ordering new rigs. Overall, we assume firmwide revenue growth of 14% in 2013 and an operating margin of 16.7%. Longer term, we think the firm’s revenue growth will be 8% annually, as the global rig fleets gradually upgrade and replace rigs after two decades of underinvestment. Stephen Ellis Mutual Fund: Primecap Odyssey Stock POSKX Category 4 Large Blend Morningstar Rating Morningstar Analyst Rating QQQQ Asset Allocation Cash US Stock Non US Stock Bond Other –100 –50 0 50 100 Expenses 0.66% This fund’s strategy is best described as patient contrarian growth. The managers are more valuation-sensitive than most growth investors, buying companies that have grown rapidly but are trading cheaply because of issues the team deems to be temporary. They’re willing to wait years for a pick’s prospects to rebound Minimum Investment $2,000 Total Assets $1.5 billion (portfolio turnover is around 10% on average), and they will let their picks cluster in a few sectors. This approach has led to streaky relative returns, but they’ve amassed a strong record both here and in a 28-year tenure at the similarly managed (and closed) Vanguard Primecap VPMCX. Greg Carlson Separate Account: Jensen Large Cap Quality Growth Category 7 Large Growth Investment Style 7 Large Growth Morningstar Rating QQQ Asset Allocation Cash US Stock Non US Stock Bond Other –100 –50 0 50 18 Morningstar Advisor April/May 2013 100 Minimum Investment $5 million This strategy’s managers follow a highly disciplined process. They will only invest in companies that have generated a return on equity of at least 15% in each of the past 10 calendar years. While this criterion eliminates the vast majority of stocks from consideration, the team can afford to be picky: It runs a concentrated portfolio of 25 to 30 stocks and tends to move at a glacial Number of Holdings 30 Total Assets $5.45 billion pace (portfolio turnover has averaged 13% over the past five years). Its holdings tend to have solid competitive advantages and sturdy balance sheets. That means the fund often lags in big rallies, but more than makes up that ground in choppy or declining markets. In a market where stocks are arguably at fair value, the team’s focus on quality can provide an edge. Greg Carlson

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013

Morningstar Advisor - April/May 2013
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot

Morningstar Advisor - April/May 2013