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Bill Nygren's Oakmark Select Fund - First Quarter 2013 Commentary
Posted by: Holly LaFon (IP Logged)
Date: April 23, 2013 11:08AM
The Oakmark Select Fund increased 8% in the past quarter, bringing the gain for the first half of our fiscal year to 13%. The S&P 500 also increased significantly, up 11% and 10% for the quarter and six months, respectively. Despite these increases, we believe stocks remain moderately undervalued relative to historical levels and extremely undervalued versus bonds. In the first quarter of our fiscal year, financial and industrial stocks were among the market's best performers, and we own a lot of them. In this past quarter, stocks of stable businesses with high dividends tended to perform better than either financials or industrials. This trend does not appear to be supported by stock valuations. We believe that it was caused by investors searching for income who found these stocks to be cheaper than bonds. Though we agree with that assessment, we continue to believe that we will be more than adequately rewarded for owning somewhat riskier businesses at much lower P/E multiples.
Our best performing stock in the quarter was Dell, up 42%. Dell (DELL) is in the midst of a bidding war between groups including Michael Dell (its CEO), Blackstone and Carl Icahn. We have decided, for now, to maintain our holding as we believe there is a reasonable probability that a higher bid will emerge. A more detailed discussion of our Dell position can be found in the commentary for the Oakmark and Oakmark Select Funds.
We lost money on four stocks in the quarter, and these stocks prevented us from keeping up with the S&P 500. Kennametal (KMT) followed a strong quarter with a 2% loss this quarter, which allowed us to fill out our position. Capital One (COF) declined 5%, due largely to management lowering its projection of how much the newly acquired HSBC credit card portfolio would add to earnings. Though we were disappointed that management bungled communication about its expectations, we don't believe this increases the probability of further earnings reductions. Our other losers were both energy stocks -- Cenovus (CVE), down 7%, and Newfield (NFX), down 16%. Both companies reported fourth-quarter losses due to write-downs of natural gas assets mandated by the low gas price on December 31. Additionally, Cenovus is being hurt by tight pipeline capacity, which results in an unusually large price discount for its oil. We don’t believe these issues are long-term problems, and therefore are not reducing our estimated value for either company.
During the quarter we added Forest Laboratories (FRX)(FRX - $37) to the portfolio. Forest doesn't have the high yield or low P/E that has attracted investors to other pharmaceutical stocks, but it does have a collection of newly introduced drugs that we believe is worth significantly more than the stock price. A more complete explanation of our interest in Forest is available in the Oakmark Fund quarterly letter.
The purchase of Forest was largely funded by a continued reduction in our Discovery position. We couldn't be more pleased with Discovery’s growth in profitability, largely due to an increased number of viewers across its networks. We are also pleased with its use of cash to repurchase shares. But with the stock trading at $70, compared to less than $9 five years ago, it is hard to argue that investors are not giving them appropriate credit for that performance.
Thank you for your continued investment in our Fund.
William C. Nygren, CFA
Anthony P. Coniaris, CFA
Win Murray, CFA
As of 3/31/13, Dell, Inc. represented 4.5%, Kennametal, Inc. 2.9%, Capital One Financial Corp. 5.2%, HSBC Holdings PLC 0%, Cenovus Energy, Inc. 3.3%, Newfield Exploration Co. 3.9%, Forest Laboratories, Inc. 4.4%, and Discovery Communications, Inc., Class C 1.1% of the Oakmark Select Fund's total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
The S&P 500 Total Return Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. All returns reflect reinvested dividends and capital gains distributions. This index is unmanaged and investors cannot invest directly in this index.
The Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
Because the Oakmark Select Fund is non-diversified, the performance of each holding will have a greater impact on the Fund's total return, and may make the Fund's returns more volatile than a more diversified fund.
The discussion of the Fund’s investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.
Guru Discussed: Bill Nygren: Current Portfolio, Stock Picks
Stocks Discussed: DELL, KMT, COF, CVE, FRX, NFX,