is a strict bottom-up investor who does not neglect the macro
picture. In the second quarter he finds stocks neither
particularly cheap nor particularly expensive, according to his
second-quarter commentary on his FPA Crescent
. He believes that Central Bankers are leading the world to
inflation where his stocks should at least perform "nominally
well," but says, "If a business or asset is good and cheap -
absolutely, not relatively - we'll buy it."
These are the stocks the fund manager keeps buying: Aon (
), Cisco (
), WellPoint (
) and Walmart (
Romick has been adding to his holding of Aon Plc almost every
consecutive quarter since the fourth quarter of 2009, when the
stock was at his lowest average purchase price of $39.50. His
highest average price paid was $52 in the second quarter of 2011,
and on Wednesday the stock trades for $46. In total, he owns
6,590,000 shares of the company.
Aon focuses on several business areas: risk management, insurance
and reinsurance brokerage, and human resources solutions and
outsourcing services. In the last four years the company has
increased its earnings by about 53%, as its stock has increased
only about 13.4%.
Aon has also improved its operating and net margins to above
pre-financial crisis levels. Its net margin reached 8.7% in 2011,
, besting its pre-2006 levels, and its operating margin reached
14.4% in 2010 and 14.2$ in 2011, beating pre-2006 levels for the
In the first quarter, the company had its best rate of revenue
growth since the second quarter of 2007 at 4%. In the same three
months, it authorized a $5 billion share repurchase program and
increased its dividend 5%.
of the Oakmark Fund also likes Aon and made the following
comments about it in his second-quarter letter:
"As one of only three insurance brokers with a global platform,
)'s market position should allow the company to directly benefit
from global economic growth. AON stock surpassed $50 in 2007 when
it earned just over $2 per share. In 2012, after a restructuring
that improved margins, AON is expected to earn over $4 per share
after adding back goodwill amortization from recent acquisitions.
Despite the growth in earnings and the potential for further
margin improvement, the stock has been stagnant. As a result, the
P/E ratio for AON has fallen from 25 times in 2007 to 11 times
now, slightly less than the P/E ratio for the S&P 500. Unlike
the insurance business, insurance brokerage is not capital
intensive. Therefore, we believe AON has the ability to return
most of its earnings to shareholders through share repurchases
and dividends. An additional feature we value is AON's potential
to generate meaningful interest income. AON, as a fiduciary,
holds its clients' capital for a short period of time before it
is turned over to the insurance companies. With today's low
short-term interest rates, there is little opportunity to
generate returns on that capital. We don't believe short-term
rates will stay low forever and like getting the option for more
rapid earnings growth when rates increase."
Steven Romick has been purchasing Cisco shares since the second
quarter of 2011, when the stock traded for $16.50 on average. He
built his position up over the next consecutive four quarters,
including his most recent and largest purchase of 10,815,000
shares in the second quarter of 2012 when the stock traded for
$18 on average. The stock on Wednesday is 9% cheaper than his
average purchase price.
Cisco has been posting five years of average annual revenue
growth of 9.4% and EBITDA growth of 3.5%, while its stock dropped
almost 48%. Its P/E ratio has consequently dropped from over 36
in 2007 to 10.4 on Wednesday. The company's operating and net
margins, however, have declined over the last three years, the
operating margin from 20.3% to 17.8% and the net margin from 17%
to 15%. Those results rebounded in the second quarter of this
year, up to 23.7% and 18.7%, respectively.
In the quarter, Cisco either acquired or announced its intent to
acquire or invest in three businesses, along with strategic
investments in Brazil to create growth. The company is attempting
to grow profit faster than revenue and has strengthened its
balance sheet with $48.4 billion in cash, up from $46.7 billion
at the end of the previous quarter.
Cisco repurchased 27 million of its own shares in the third
quarter of 2012 and paid a 40 cent dividend.
WellPoint Inc. (
Romick first bought shares of WellPoint when its shares were
beginning to recover from the fiscal crisis, purchasing 668,000
shares in the fourth quarter of 2009 at an average price of
$52.50. He then bought more in the second quarter of 2010 at an
average of $55, in the third quarter of 2011 after a price drop,
and in the first and second quarter of 2012, at his highest
purchase price of an average of $69 and his smallest purchase
size. Wednesday's $53.94 purchase price is about 12% cheaper than
his average cost per share.
Like the previous two stocks Romick keeps buying, WellPoint's
revenue and EBITDA grew over the last five years, as its stock
declined. Revenue and EBITDA per share grew at an average annual
rate of 13.3% and 10%, respectively, while the stock declined
33.5%. Overall revenue, however, is down from its level five
years ago, as is net income. Its P/E multiple has likewise
dropped from over 16 five years ago, to 8.15 on Wednesday.
On Wednesday, the company announced that it would regain access
to Walgreen Co. (
) by mid-September, through pharmacy-benefits manager Express
Scripts Holding Co. (
), who recently reached a deal with the pharmacy after breaking
ties with it in January.
In the second quarter, WellPoint announced it would reduce its
full-year 2012 outlook due to lower enrollment and slightly
higher medical cost trends. Its medical enrollment declined by
126,000 in the second quarter, to 33.5 million members as of June
In June, WellPoint also announced it would acquire 1-800 CONTACTS
Inc., the largest direct-to-consumer contact lense retailer in
the U.S., in a deal that will close in the third quarter of 2012.
It will pay with available cash but financial terms were not
Romick bought Walmart shares for seven consecutive quarters
beginning in the fourth quarter of 2009 at an average price of
$52.50, but made a small reduction in the fourth quarter of 2011
when the price reached an average of $57. In the second quarter,
he sold 1.88 million shares when the price climbed to an average
of $63, for a solid gain. The stock has since gone even higher,
to $72 on Wednesday.
Wallace Weitz commented on the cheapness of Walmart in his
shareholder meeting in his first-quarter letter:
"During the intervening twelve years [March 2000 to March 2012],
many of the growth favorites of the day, both tech-oriented and
others, have experienced strong business growth while their stock
prices have languished. Microsoft (
), Dell (
) and Wal-Mart (
) have each roughly tripled earnings per share, but their stock
prices have nothing to show for it. Value rose, but valuation
(the price people were willing to pay for those earnings)
In the last ten years, the company has grown its revenue per
share 10.2% and EBITDA 11.3% annual rate, while its stock
remained relatively flat. Year to date, though, the stock has
increased 20.62% and hitting all-time highs. GuruFocus has
written about how the stock's recent jump has placed it near fair
See the complete list of stocks Steven Romick keeps buying here.
Also see his buys and sells at his see his portfolio here.About
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