A fund manager who's crushed 99% of his rivals for the past decade told us his 4 favorite stocks of today - and the 4 he expects to hold for 10 years
- Mark Mulholland's Matthew 25 fund has succeeded in all kinds of markets. Kiplinger ranks it as one of the best mutual funds of the past 10 and 20 years, along with its strong returns in 2019.
- Reflecting his success over those different time horizons, Mulholland told Business Insider about the four stocks he thinks has the most upside over the next few years, and his top picks for the next 10.
- While Mulholland says he focuses on valuation and company fundamentals first, he explained that he's willing to bend that approach for a company of superior quality.
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A lot of investors will tell you they think about the long term and ignore the short term. But if they're succeeding over both of those time frames, they're doing something right.
Mark Mulholland runs the Matthew 25 Fund, and he can boast that he's done just that: The fund topped 99% of its large-cap peers in 2019 with a 42.1% return, according to Kiplinger. Looking out over the past decade, it also stands above 99% of its competition, with an annual return of 16.1%.
Kiplinger ranks the fund in its top 10 over the one-, 10-, and 20-year periods. It's also earned a four-star rating from Morningstar.
"There's three things you're always evaluating: Momentum, price to fair value, and growth," he told Business Insider in an exclusive interview. "In the short run only momentum matters, but in the long run … it's price and growth that's going to matter."
Mulholland says he's built a portfolio that should grow at a much better rate than the rest of the market, but have substantially lower price to earnings growth ratios. And over the next three to five years, he's most optimistic about these four investments. He thinks they're likely to bring in more than 20% a year in that time.
4 stocks for right now
(1) Fannie Mae preferred stock
Mulholland sees Fannie Mae as a high-earning company that's trading at a huge discount. The federal government took over the mortgage financing company more than a decade ago in the wake of the housing crisis that touched off the Great Recession, and its stock is worth about 5% of what it was before the housing bubble burst.
All of that is likely scaring investors away. So is the possibility that more stock will be issued, diluting the value of the existing stock. But value managers like Mulholland are known for strong contrarian opinions, and he argues that Fannie Mae is profitable company that is now building its cash reserves.
"They generate $15 to $16 billion a year in after-tax profits. What's the present value of that? It's at least $120 billion," he said. Fannie Mae's current market cap is $10.5 billion.
Meanwhile Fannie Mae's business of backing 30-year mortgages means it will continue to earn money for a long time, and his investment in preferred stock means he'll be paid back even if Fannie Mae stops underwriting new mortgages or if there are new offerings of common stock.
(2) Goldman Sachs
Mulholland calls Goldman "probably the strongest financial brand in the world," and says the stock could top $400 a share in four years based on its current earnings and returns.
"You can get that stock at ... 7.5% growth of book, 12.5% return on equity, 12.5 P/E ratio. And it gives me 20% compound return potential from here," he said.
(3) FedEx
FedEx delivered some of the worst returns in Mulholland's portfolio last year as its stock was hammered by international trade tensions and its breakup with Amazon. While he doesn't invest based on trends alone, he thinks FedEx will keep benefiting from online retail to an extent that outweighs the threat from Amazon.
"On macro analysis, I feel like they have the wind at their back," he said. "Online and shopping and home or business delivery of goods is going to continue to grow and retail space ... is going to continue to decline."
(4) Polaris
Polaris and Apple are Mulholland's longest-tenured investments, as he's owned both for more than 20 years. Once a "David" going up against Goliaths like Yamaha and Harley Davidson, he says Polaris has grown from just a snowmobile maker to a major manufacturer of motorcycles and ATVs by coming up with exciting new products.
Polaris' sales have climbed roughly tenfold in the time Mulholland has owned the stock, and he says it remains an appealing buy.
"I can get this company with a clean balance sheet, low leverage at 8.5 times EBITDA," he said. "At 12 [times] consensus it has double the market growth rate. I'm not paying any premium for it. It's fantastic."
Extending that horizon out for a decade brings slightly different results. Mulholland says that if he had to pick just four stocks to hold for the next 10 years, he would keep Goldman and FedEx in his portfolio and add these two tech giants.
4 stocks for the next 10 years
(1) Goldman Sachs (see above)
(2) FedEx (see above)
(3) Apple
After roughly doubling in a year, Apple has become a little expensive for Mulholland's taste. But it remains his second-largest holding even after he's sold some of his stock, as he's willing to deviate a bit from his value-oriented approach for Apple because of its quality.
And over the long term he remains enthusiastic about Apple's potential. He prizes pricing advantages, and Apple has that in spades: He estimates that its profit margins are three or four times greater than the average S&P 500 company.
"You have a clean balance sheet, you have a good manager," he adds. "I still feel like the handheld cycle is far from over."
(2) Facebook
Muholland describes his view on Facebook, which he added to his portfolio in 2016, as "buy low, let it grow." He says that based on its earnings growth, the stock could go as high as $393 a share in 2025 without stretching its valuation.
"It's somewhere around 13 times earnings" today, Mulholland said of the stock. "That is a completely fair price for one of the most dominant technology, social media companies."