Charles Brandes' Firm Buys FEMSA, Trims Largest Holding Cemex

Firm of Benjamin Graham disciple releases 3rd-quarter portfolio

Nov 19, 2020

Brandes Investment Partners disclosed its third-quarter portfolio last week.

Following Benjamin Graham's value investing style, the San Diego-based investment firm, which was founded by the now-retired guru Charles Brandes (Trades, Portfolio), takes positions in out-of-favor securities that have attractive total return potential and holds them until the market recognizes their true worth.

Keeping these criteria in mind, the firm entered eight new positions during the quarter, sold out of 25 investments and added to or trimmed a slew of other existing holdings. Among the most notable trades was a new stake in Fomento Economico Mexicano SAB de CV (FMX, Financial) as well as reductions in the NXP Semiconductors NV (NXPI, Financial), Alibaba Group Holding Ltd. (BABA, Financial), Cemex SAB de CV (CX, Financial) and Microsoft Corp. (MSFT, Financial) positions.

Fomento Economico Mexicano

The firm invested in 1.08 million shares of Fomento Economico Mexicano, allocating 2.12% of the equity portfolio to the stake. The stock traded for an average price of $58.41 per share during the quarter.

Also known as FEMSA, the Mexican company, which bottles Coca-Cola products and operates a chain of convenience stores, has a $26.9 billion market cap; its shares were trading around $75.25 on Thursday with a price-earnings ratio of 130.24, a price-book ratio of 2.17 and a price-sales ratio of 1.08.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

Weighed down by poor interest coverage and a low cash-to-debt ratio, GuruFocus rated FEMSA's financial strength 5 out of 10. The Altman Z-Score of 1.78 also warns the company could be in danger of going bankrupt unless it improves its liquidity. The company is also destroying value for shareholders as the weighted average cost of capital exceeds the return on invested capital.

The company's profitability fared a bit better, scoring an 8 out of 10 rating despite having declining margins. In addition, FEMSA's returns underperform over half of its competitors, but it has a moderate Piotroski F-Score of 4 that indicates operations are stable. As a result of recording a slowdown in revenue per share growth over the past 12 months, the predictability rank of five out of five stars is on watch. According to GuruFocus, companies with this rank return an average of 12.1% annually over a 10-year period.

Of the gurus invested in FEMSA, First Eagle Investment (Trades, Portfolio) has the largest stake with 1.57% of outstanding shares. Other top guru shareholders are Jim Simons (Trades, Portfolio)' Renaissance Technologies, Ron Baron (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Tom Russo (Trades, Portfolio).

NXP Semiconductors

With an impact of -1.43% on the equity portfolio, Brandes' firm trimmed its NXP Semiconductors holding by 73.16%, selling 410,170 shares. Shares traded for an average price of $121.94 each during the quarter.

The firm now holds 150,456 shares total, accounting for 0.65% of the equity portfolio. GuruFocus estimates the investment has gained 43.70% since being established in the fourth quarter of 2018.

The Netherlands-based semiconductor manufacturer has a market cap of $41.73 billion; its shares were trading around $150.07 on Thursday with a price-book ratio of 4.7 and a price-sales ratio of 5.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 2 out of 10 also aligns with this assessment since the share price and price-sales ratio are both approaching 10-year highs.

NXP's financial strength was rated 4 out of 10 by GuruFocus. As the company has poor interest coverage and a low cash-to-debt ratio, the Altman Z-Score of 2.39 indicates it is under some pressure since assets are building up at a faster rate than revenue is growing. The WACC also eclipses the ROIC, implying value is being destroyed.

The company's profitability scored a 7 out of 10 rating despite having margins and returns that underperform over half of its industry peers. NXP also has a low Piotroski F-Score of 3, which indicates operating conditions are in poor shape, while the 3.5-star predictability rank is on watch as a result of declining revenue per share over the past year.

Alibaba

Impacting the equity portfolio by -1.06%, the firm trimmed the Alibaba position by 47.16%, selling 161,009 shares. During the quarter, the stock traded for an average per-share price of $263.14.

Brandes Investments now holds 180,411 shares total, which account for 1.83% of the equity portfolio. GuruFocus data shows it has gained an estimated 36.67% on the investment since the fourth quarter of 2019.

The Chinese e-commerce company has a $694.08 billion market cap; its shares were trading around $257.60 on Thursday with a price-earnings ratio of 37, a price-book ratio of 5.59 and a price-sales ratio of 8.33.

Based on the Peter Lynch chart, the stock appears to be overvalued.

Alibaba's financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to adequate interest coverage and a high cash-to-debt ratio, the company has a robust Altman Z-Score of 7.55.

Although the company's margins are declining, they still outperform a majority of competitors. Alibaba also has strong returns, a moderate Piotroski F-Score of 5 and a 2.5-star predictability rank that is on watch. GuruFocus data shows companies with this rank typically return an average of 7.3% annually.

Cemex

The firm curbed its Cemex stake by 13.23%, selling 8.88 million shares. The transaction had an impact of -0.78% on the equity portfolio. The stock traded for an average price of $3.26 per share during the quarter.

Brands Investment now holds 58.28 million shares total, which make up 7.66% of the equity portfolio. According to GuruFocus, it has lost an estimated 17.58% on the investment so far. Cemex remains the firm's largest holding.

The concrete and cement manufacturing company headquartered in Mexico has a market cap of $7.15 billion; its shares were trading around $4.74 on Thursday with a price-book ratio of 0.9 and a price-sales ratio of 0.02.

The Peter Lynch chart suggests the stock is overvalued.

GuruFocus rated Cemex's financial strength 5 out of 10. In addition to weak interest coverage, the company's low Altman Z-Score of 0.51 warns it could be at risk of bankruptcy. The WACC is also above the ROIC, indicating value is being destroyed as the company grows.

The company's profitability scored a 6 out of 10 rating on the back of returns that are underperforming a majority of industry peers. The operating margin, however, is outperforming slightly over half of the other companies in the building materials space. Cemex also has a moderate Piotroski F-Score of 6 as well as a one-star predictability rank. GuruFocus says companies with this rank return, on average, 1.1% annually.

Of the gurus invested in Cemex, Dodge & Cox has the largest stake with 5.9% of outstanding shares. Howard Marks (Trades, Portfolio), Simons' firm and Pioneer also own the stock.

Microsoft

The firm reduced its Microsoft holding by 89.08%, selling 118,622 shares. The trade had an impact of -0.73% on the equity portfolio. During the quarter, shares traded for an average price of $210.04 each.

It now holds 14,543 shares total, representing 0.11% of the equity portfolio. GuruFocus data shows the firm has gained approximately 97% on the investment.

The Redmond, Washington-based software company, which is known for its Windows operating system and Office productivity suite, has a $1.6 trillion market cap; its shares were trading around $211.44 on Thursday with a price-earnings ratio of 34.14, a price-book ratio of 12.95 and a price-sales ratio of 11.01.

According to the Peter Lynch chart and GuruFocus valuation rank of 1 out of 10, the stock is overvalued.

Microsoft's financial strength was rated 7 out of 10 by GuruFocus, driven by a comfortable level of interest coverage as well as a robust Altman Z-Score of 7.14. Its assets, however, are building up at a faster rate than revenue is growing, which indicates the company may be becoming less efficient. Regardless, it has good value creation since the ROIC surpasses the WACC.

The company's profitability fared even better, scoring a 9 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 8. Consistent earnings and revenue growth also contributed to a 2.5-star predictability rank.

With a 0.30% stake, Fisher is the company's largest guru shareholder. Other top guru investors include Primecap, Pioneer, Dodge & Cox, Coleman, Segalas, Halvorsen, Steve Mandel (Trades, Portfolio), Sands, First Eagle, Grantham, Stanley Druckenmiller (Trades, Portfolio), Hotchkis & Wiley and Mairs and Power (Trades, Portfolio).

Additional trades and portfolio performance

During the quarter, Brandes Investment also entered new positions in Coca-Cola Femsa SAB de CV (KOF, Financial), Park Aerospace Corp. (PKE, Financial), Micron Technology Inc. (MU, Financial), Raytheon Technologies Corp. (RTX, Financial), HDFC Bank Ltd. (HDB, Financial), Prestige Consumer Healthcare Inc. (PBH, Financial) and Varex Imaging Corp. (VREX, Financial).

The firm's $2.89 billion equity portfolio, which is composed of 151 stocks, is most heavily invested in the health care sector with a weight of 23.80%, followed by smaller representations in the financial services (17.19%) and industrials (13.78%) spaces.

According to GuruFocus, the firm's U.S. Value Equity Fund returned 22.91% in 2019, underperforming the S&P 500's 31.48% return.

Disclosure: No positions.