Expert Stock Picks: Blue-Chip Christmas Crackers

Published in Investing on 22 December 2011

We spotlight some of the best blue-chip ideas from top professional stockpickers.

As we head into the festive season, here are some blue-chip Christmas crackers from our select pool of top professional stockpickers.

This is our second visit to the FTSE 100, having kicked off the series with blue chips back in September. Incidentally, if you want to know more about the series and our 'Expert Eight' stockpickers, have a read of the introductory article.

Top 10s

Three of our Expert Eight have a good number of FTSE 100 companies in their portfolios, while three others include at least some.

This quarter, seven blue chips figure in the top 10 holdings of more than one manager, compared to six last quarter. The seven are as follows:

CompanyNo. of managers holding
BG Group (LSE: BG)2
British American Tobacco (LSE: BATS)2
Diageo (LSE: DGE)2
Rio Tinto (LSE: RIO)2
Royal Dutch Shell (LSE: RDSB)2
Sage (LSE: SGE)2
Unilever (LSE: ULVR)2

Four of the seven companies appeared in the table last time: BG Group, British American Tobacco, Rio Tinto and Royal Dutch Shell.

There are three newcomers -- Diageo, Sage and Unilever -- while two companies have dropped out of the table: Burberry (LSE: BRBY) and Smiths Group (LSE: SMIN).

Buys and sells

Business software and services firm Sage Group is a new entrant on share price strength rather than recent buying by our stockpickers -- indeed, one of our managers has made a partial sale of his holding in Sage during November.

Fellow new entrants Diageo and Unilever also owe their graduation to share price strength, as jittery investors have been falling over each other in a stampede for 'quality' companies since the August market crash

However, nobody ever got rich following the herd, and the actions of a couple of our managers, who have a liking for consumer goods businesses with strong brands, are noteworthy.

The two managers were buying or adding to some of their holdings in these types of company before the summer sell-off; but, since then, appear to have seen more attractive big-brand, consumer-goods opportunities outside the UK stock market -- in Amsterdam-listed Heineken, in the case of one manager, and Paris-listed L'Oreal, in the case of the other.

For the most resolutely blue-chip-focused stockpicker of our Expert Eight, contrarianism has taken the form of adding to his favoured holdings in 2011's most beaten-up sectors -- banking and mining.

The two blue chips I would highlight as being of particular interest to investors today are:

1. Rio Tinto (3,096p)

Of three companies I highlighted last quarter, BG Group is up a bit, industrial conglomerate Smiths Group is down a bit and Rio Tinto is down quite a lot – in fact, far enough, at getting on for 10%, to make the big miner well worth highlighting again this quarter.

Richard Buxton (Schroder UK Alpha Plus) was a buyer of Rio in June when the shares were trading north of 4,000p; but they were hammered in August by a combination of the general market meltdown and interim results that fell a little short of consensus analysts' expectations.

Our stockpickers said at the time that "the fundamentals do not justify the extent of these falls" (Mark Slater – Slater Recovery), and that Rio was "materially undervalued on a longer-term view" (Mark Sheppard -- Manchester & London (LSE: MNL)).

Rio has since released slightly muted third-quarter production figures but, as my Foolish colleague Stephen Bland pointed out earlier this month, the company just doesn't appear to believe the market's gloomy view of its own future.

2. Lloyds (23.6p)

Plenty of you will doubtless feel that Lloyds Banking Group (LSE: LLOY) is not so much a Christmas cracker, as the riddle or lame joke that you find within!

Richard Buxton is bullish on the part-nationalised bank, and has been adding to his holding as the share price has sunk over the last quarter. As Buxton began averaging down at around the 30p level, investors today will certainly be buying in at a discount to the average price paid by our veteran blue-chip stockpicker.

Mark Sheppard is another of our Expert Eight who was a buyer of Lloyds at a significantly higher price than today, the company appearing as a small holding in his portfolio at the end of May, having been acquired during the previous six months.

Richard Buxton is confident Lloyds (and other UK banks) can work their way through their losses and write-downs: "They are letting air out of the balloon slowly, which is a completely normal way to work out of a financial crisis."

In a nutshell, Buxton believes that, in time, Lloyds will be making a 15% return on equity, meriting a rating of one-and-a-half times book value. Even if regulation has the effect of reducing return on equity to 10% and banks trade at, but never above, book value again, there is still considerable upside from the market's current rating (less than half book value).

To me, it seems appropriately contrarian to end a year of pessimism for metals and financials with optimistic picks of a miner and a bank. Merry Christmas everyone!

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More in this series:

> G A Chester owns shares in Manchester & London. The Motley Fool owns shares in Unilever.

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andrew97d 23 Dec 2011 , 8:51pm

The problem with big miners is that although they are in the FTSE 100, they depend on the Chinese economy for their profits and share price. In fact the biggest movements in the FTSE100 tend to be caused by movements in the share prices of a handful of London-listed mining companies. People who are buying trackers assuming that they are investing in the UK stock market are actually taking a punt on the state of the Chinese economy.

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