Why Famous Value-Fund Managers Bought Google and Analog Devices
With the market up 15% this year and earnings growth faltering it’s not exactly ripe pickings for fund managers with a value bent. For two all-star value shops the tech sector was where they established new positions.
The team at Dodge & Cox picked up Google (GOOG) last quarter. If you’re not familiar with this shop, the $40 billion Dodge & Cox Stock fund is considered the standard bearer for old-school patient value investing.
For all the headlines over Google’s third quarter miss -- and the bungled earnings report release -- it’s likely the Dodge & Cox team is still above water on its new position. Unless you bought Google in mid September, the stock price after the near 10% slump after the earnings report is still higher than at any time in the third quarter. Here's the Google stock chart, with the harrowing drop of earlier this week.
So what’s a resolute value shop doing owning Google? Well, both price-to-book and price-to earnings for Google have been trending sharply lower for a company that’s still churning out healthy profits…Motorola Mobility be damned. Nice PE ratio.
And for a stock generating plenty of earnings and free cash, it’s PEG ratio is stuck below 1.0.
Google has increasingly hit the buy list of inveterate value investors. Steve Romick, manager of FPA Crescent established a position in Google earlier this year, and has been buying throughout the year.
Romick added one more new name in the third quarter, chipmaker Analog Devices (ADI). Given slower economic growth, the highly cyclical chip sector is struggling amid lower industrial demand. But Romick isn’t worried about this quarter or next, he’s looking for companies with long term earnings machines selling at a deep discount to his estimate of their intrinsic worth. A big chunk of Analog Device’s sales is from chips used in wireless base stations -- not exactly a dying market. And right now the stock is hovering at a valuation near a 10-year low.
At the same time, earnings and cash flow have been trending higher.
And for the dividend seekers out there, Analog Devices doesn’t disappoint.
That’s a pretty nice value in a market offering up few steals.
Carla Fried is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis