Contrafund's Will Danoff Bullish For 2013: What Stocks He Likes

Will Danoff is manager of Fidelity's Contrafund and he recently sat down with Fidelity Viewpoints to share his outlook for 2013.  He's bullish and so we wanted to highlight what stocks he's looking at.


On Why He's Bullish This Year

"I’m bullish. Stocks are relatively cheap, and U.S. companies have become much leaner. Management teams were worried about the environment, so they were conserving cash and allocating capital prudently. M&A activity was down about 20% in 2012. Boards were saying, 'We’re not going for the long ball. We’re going to focus on maintaining lean inventories, low capital spending, and tight expenses.' As a result, companies are nicely profitable and generating a lot of cash.

So looking forward, I’m hopeful that we’re going to have modest top-line growth that will lead to decent earnings-per-share growth, good free-cash-flow yields, and total returns that may be a lot better than what we will see from cash and bonds."

He also went on to say that,

"My guess is a year from now the economy’s going to improve and stocks are going to be a good place to be. I’m bullish. So, I think if you’re in cash, you have to really think hard about it and say, 'How much cash do I really need?'"

This is a concept that's been talked about by many managers, including Bridgewater's Ray Dalio who said cash will move into 'stuff' in 2013.  David Tepper of Appaloosa Management has also been quite bullish.


What Stocks He Likes

Danoff notes that the key to his strategy has been identifying the best companies in each industry.  There's a few themes/industries he likes this year, and they all seem hinged on an economic recovery: housing, manufacturing, and industrials.

In particular, the Contrafund manager says he's finding most opportunities that should benefit from more competitive US manufacturing (companies are moving plants back from overseas).

He also likes US companies with lots of international exposure, like Colgate-Palmolive (CL), Estee Lauder (EL), and Starbucks (SBUX).

In tech, he likes internet plays such as Google (GOOG), Facebook (FB), and Yahoo (YHOO).  He also is bullish on the software as a service trend, fancying the likes of Workday (WDAY), Salesforce.com (CRM), and Concur (CNQR).


On Tech Giants Google (GOOG) & Apple (AAPL)

These two tech giants are some of his fund's largest holdings.

Danoff's take on Google: "The stock has done basically nothing since 2007, but the earnings have roughly doubled, and the company is generating a huge amount of free cash flow—we estimate the stock is producing roughly a 9% free-cash-flow yield. And net of the cash, the stock has been trading around 13 times earnings while core revenues have been growing almost 20% annually. So I have believed that Google could continue to grow and had the potential for P/E (price-to-earning multiple) expansion."

We've also highlighted how Ricky Sandler's hedge fund Eminence Capital has been bullish on Google as well as it's their largest position at around a 9% position for them.

Danoff also notes that AAPL has been a good holding for his fund as the company's been generating a ton of free cash flow.  The problem is that most of it is overseas (and it's a massive amount of money too) and he also pointed out that competition has intensified in the smartphone and tablet markets.  You can read more of Danoff's outlook here.

East Coast Asset Management on Mispricings: Q1 Letter

Christopher Begg's East Coast Asset Management is out with their first quarter letter and in it they focus on mispricings.  We like to highlight their letters due to the focus on investment process.  After all, investing is a profession that requires continual education.

Begg shares his wisdom by writing, "Mispricing discovery is intelligent investing. We want to clarify that mispriced does not mean cheap - mispriced investments are not partial to any particular asset class nor are they partial to style boxes and growth rates."

We've previously highlighted how Greenlight Capital's David Einhorn looks for mispricing when investing, seeking to better understand situations to generate returns.

Begg goes on to breakdown mispricings into two types:

Structural - These exist "when an event occurs that forces a large population of owners to sell without any change in the investment's intrinsic value.  Examples of structurally induced selling would include: when an investment is deselected from an index, when a company is spun off from a larger parent company, or perhaps when a company's credit rating is reduced."

Psychological - He says that these mispricings "are driven from collective investor psychology which induces broad selling or a lack of buying in an investment."

East Coast feels that "our greatest source of mispricings occurs when myopic investors have difficulty focusing on the distant compounding merit of a great business (compounder category) or the inflection point of a material change in an industry that is improving (transformation category)."

Begg then goes on to highlight their investment in Colgate-Palmolive (CL) as a prime example.


Current Market Commentary

East Coast also summarizes their views on the current market, writing

"In aggregate, the market is reasonably priced at below 14 times 2012 projected earnings; inverting the multiple means that we are getting a 7.5% earnings yield.  If we include an economic growth rate of 2-3% we arrive at expected equity returns in high single digits."

Their letter also goes on to examine Apple (AAPL), concluding that, "We don't disagree with the quality of the business nor do we doubt that the valuation looks attractive.  What we do struggle with is the ability to truly compound at an attractive rate based on size."  We've also posted up on the subject with our post: The Apple Conundrum.

Embedded below is East Coast's first quarter letter:



For more from this firm, head to East Coast on embracing uncertainty as well as their great piece on gaining an investment edge.

Consensus Versus Variant Perception in the Markets: East Coast's Q2 Letter

We're pleased to present the second quarter 2010 commentary from East Coast Asset Management. The letter, penned by Chief Investment Officer Christopher Begg, touches on a number of intriguing and hotly debated topics, including inflation. Some of you will recall that we featured some past commentary from East Coast where they examined the deflation-reflation continuum.

East Coast is decisively in the inflationist camp. They believe that central banks armed with printing presses can only lead to one outcome. Their portfolio is positioned to mitigate the effects of any tail risk events such as hyperinflation, a bond bubble, a spike in interest rates, paper currency debasement, and a double dip recession. You'll recall that Baupost Group's Seth Klarman has also protected his portfolio from tail risk events as a form of cheap insurance.

Summarizing East Coast's stance, Begg writes, "The greatest opportunities to compound capital come from periods where dislocations are being driven more by 'what ifs' than the 'what is'. Fundamentals trump hypotheticals and facts weigh heavier than emotions."

Maybe the most intriguing aspect of their commentary though is the list of consensus views they've compiled. They've outlined 10 areas where there are currently consensus views in the market; areas where East Coast has strafed away from the crowd and into an opportunity with a perceived edge. They see these variant opportunities as a means to mitigate risk away from the consensus. This is a topic we've very briefly touched on in our piece where we examined the hedge fund herd mentality.

Below is East Coast Asset Management's list of 10 consensus views and their corresponding variant perception:

1. Consensus: Everyone is a macro-economist. Variant Perception: Fundamental/value investing and focusing on micro themes is the key.

2. Consensus: Binary extreme outcomes of inflation/deflation. Variant Perception: Individual investment merits based on expected return.

3. Consensus: Flood to fixed income as individual investors chase yield. Variant Perception: Bond bubble. Attractive equity total return expectations.

4. Consensus: Inflation protection via TIPS. Variant Perception: Owning businesses with pricing power.

5. Consensus: Gold - speculators are weak holders. Variant Perception: Own gold for mid-long term as paper currencies are debased. John Paulson started his gold fund for the exact same reason: as a bet against the US dollar.

6. Consensus: Overly bearish. Variant Perception: Bullish on fundamentals.

7. Consensus: Short-term time horizons. Variant Perception: Mid-to-Long term time horizons.

8. Consensus: Low rates will be the norm. Variant Perception: Interest rates will dramatically rise across the curve. (Legendary hedge fund manager Julian Robertson had previously placed a bet on sharply rising interest rates).

9. Consensus: Inferior companies can thrive. Variant Perception: High quality companies have a competitive advantage. East Coast specifically highlights Nestle (NSRGY), Waste Management (WM), Colgate (CL), Coca Cola (KO), Novartis (NVS), and Express Scripts (ESRX). We've seen numerous hedge funds become bullish on high quality companies as well. In particular, Andreas Halvorsen's hedge fund Viking Global favors ESRX. Additionally, we earlier today highlighted East Coast's bullish stance on Beckton Dickinson (BDX).

10. Consensus: Complexity. Variant Perception: Simplicity.

Begg examines each of the ten above listed views in-depth in his most recent letter and ends his commentary by giving us a view of their most recent portfolio construction. We highly recommend reading the entire East Coast second quarter letter embedded below:



You can download a .pdf copy here.

For more from East Coast Asset Management, be sure to check out their recent bullish presentation on Becton Dickinson (BDX) that we posted earlier today. Additionally, those intrigued by the inflation/deflation debate should head to their past piece on the deflation-reflation continuum. For more great investment commentary we posted up Perry Capital's latest letter yesterday as well.