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How Bill Nygren Has Been Outperforming
Posted by: Holly LaFon (IP Logged)
Date: June 8, 2012 04:40PM
“How should individual investors deal with high volatility? I’d say they should pretty much ignore it,” Bill Nygren expressed in his last quarter of 2011 letter, a quarter in which his fund gained 11 percent, after ending the previous quarter down 20 percent. The view continued to pay off as for the six months ended March 31, 2012, his fund was up 27 percent, outperforming the S&P’s 26 percent. Even after strong gains, he believes some of his stocks remain undervalued.
In spite of short-term volatility, Nygren’s strategies have delivered a return of 18.25 percent over the last three years and 4.15 percent over the last 10 years.
Apple (AAPL), Nygren’s fourth-largest holding, contributed the most to his fund’s return due to its 48 percent return in the first quarter and large weighting in his portfolio. After five years growing revenue at a rate of 38.2 percent and EBITDA at 63.5 percent, Apple still has a P/E ratio of 13.7, and Nygren believes it remains attractively priced.
In the first quarter, Nygren sold 10,000 shares of Apple at an average price of $506 per share. He has made a substantial gain on the stock since purchasing 250,000 shares before the fourth quarter of 2009, below an average purchase price of $197.
Nygren’s best-performing stock in the first quarter was Bank of America, which increased 72 percent. He bought the stock in the first quarter of 2010 at an average of $16.23, but continued to accumulate shares as the price plunged to his lowest purchase price of $6 in the fourth quarter of 2011, when he made his second largest purchase of 2.5 million shares.
In the first quarter of 2012, he bought an additional 2 million shares as the price rose to about $8 per share. It was his third largest add of the quarter.
Last year was punishing for Bank of America; it fell approximately 60 percent. Nygren explains that banks becoming adequately capitalized and able to return more capital to shareholders helped them reverse their losses in the first quarter.
His other bank holdings also made strong contributions. JPMorgan Chase was up 39 percent; Capital One 32 percent; and Wells Fargo 25 percent. He believes they all remain attractively priced as well.
JPMorgan (JPM), for instance, increased its Basel I Tier 1 common ratio to 10.4% in the first quarter, increased from 10% in the fourth quarter. It also increased its quarterly dividend to $0.30 from $0.25, and authorized a $15 billion stock repurchase program.
Capital One’s Tier 1 ratio increased 220 basis points to 11.9 percent in the first quarter. Its dividend has remained at $0.05 per share since June 2009. JPMorgan and Capital One (COF) are Nygren’s top holdings.
Wells Fargo likewise increased its Tier 1 ratio of 9.95 percent from 9.46 the previous quarter. It raised its dividend rate to $0.22 per share from $0.12 per share the previous quarter. While 2011’s stock prices were remarkably volatile, Nygren notes that good things were happening to his businesses nonetheless. Over the year, 47 of his 56 companies reduced their outstanding shares, with the median reduction just over 3 percent.
“Although that might not sound like much, if a business grows its earnings by 4% while shrinking its shares by 3%, EPS will grow at a 7% rate,” Nygren noted in his first-quarter letter.
Also during the year, 40 of his 56 companies were net acquirers of business (their acquisitions were more than their proceeds from divestitures). Twenty-seven of his 56 companies ended the year with less net debt.
“Cash that earns 1 percent after tax would have to be valued at 100x earnings to fully reflect its value. With the stock market trading at just over 13x expected earnings, it seems that cash today is an unusually hidden asset,” he said.
Twelve of his companies did all four: increased dividends, had share buybacks, made an acquisition and improved their balance sheet.
With the belief that the corporate trend would continue, Nygren bought these new holdings during the first quarter of 2012: Franklin Resources (BEN), Parker Hannifin (PH) and Goldman Sachs (GS).
Nygren comments on all three of his new holdings in his fourth quarter letter.
See Bill Nygren’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Bill Nygren.
Guru Discussed: Bill Nygren: Current Portfolio, Stock Picks
Stocks Discussed: AAPL, BAC, GS, JPM, COF, BEN,