Here's What This Activist Investor Has Been Buying and Selling


Every quarter, many money managers have to disclose what they've bought and sold, via 13F filings. Their latest moves can shine a bright light on smart stock picks.

Today let's look at activist investment firm Relational Investors. Based in San Diego and run by Ralph Whitworth, the company has made a name for itself by agitating for changes at many major corporations, such as Genzyme and Home Depot. (At Home Depot, Whitworth called for the company to exit its commercial building supply business.)

The company's reportable stock portfolio totaled $5.5 billion in value as of June 30, 2012, and contained just a couple dozen stocks. Indeed, the top 10 holdings make up about 75% of the overall portfolio's value.

Interesting developments
So what does Relational Investors' latest quarterly 13F filing tell us? Here are a few interesting details:

For starters, there were no new holdings.

Among holdings in which Relational Investors increased its stake were Esterline Technologies (NYS: ESL) and Flowserve (NYS: FLS) . Esterline makes products and systems for the aerospace and defense industries and is down 30% over the past year, partly due to shaving its projections for the rest of the year on lower aircraft orders. Its CEO noted, though, that these are temporary issues, and that "the way things are lining up, I expect robust growth in the next fiscal year."

Flowserve, up 42% and hitting a 52-week high recently, specializes in industrial flow management equipment. Bulls like its backlog and share repurchases, and they're also hopeful that the folks at Relational might spur the company to make some profit-plumping moves. One promising catalyst is the possible increase in pipeline capacity to meet demand from utilities and new oil and gas fields.

Relational Investors reduced its stake in several companies, such as Occidental Petroleum (NYS: OXY) . The oil company has posted weak revenue and earnings recently, due to falling oil prices and higher operating costs. It's investing in new exploration and development, though, and is poised to perform well when conditions improve. Its profit margins have generally been rising over the past few years, too, with net margins recently near a hefty 26%. Some also like that the company's new CFO has solid mergers and acquisitions experience.

Finally, Relational Investors unloaded several companies, such as Applied Materials (NAS: AMAT) and Caterpillar (NYS: CAT) . Semiconductor fabrication equipment maker Applied Materials is in a very cyclical business, with revenue, earnings, and orders down recently. But as demand for smartphones and tablets grows and manufacturing picks up, Applied Materials should receive plenty of orders. Bulls like its 3.3% dividend and that the company is planning to buy back billions of dollars of its own shares. Bears worry that the chip industry isn't yet in a strong rebound phase, pointing to companies such as Intel lowering its outlook for the rest of the year. Even Applied Materials lowered its outlook.

Caterpillar, meanwhile, seems quite strong, with revenue and earnings averaging 19% and 59% growth rates, respectively, over the past three years. With a yield near 2.4%, it has been a volatile stock lately, but its prospects are solid: As the global economy improves, there will be more infrastructure and construction work requiring its machines. The company, which has long taken a hard line with unions, also recently settled a strike. Its second quarter featured record sales but also a lowered outlook, due to slowing growth in China and elsewhere. It's also being sued by some major investors for allegedly wasting company assets via compensation plans.

We should never blindly copy any investor's moves, no matter how talented the investor. But it can be useful to keep an eye on what smart folks are doing, and 13-F forms can be great places to find intriguing candidates for our portfolios.

If you're interested in Caterpillar, check out our brand-new research report on it, which comes with a year of free updates. It will help you decide when you might want to jump into this cyclical company, and what to look for. Click here to access it now.

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