Akre Capital's Top Trades of the 4th Quarter

Firm adds to American Tower, CoStar Group holdings

Feb 12, 2021

Investment firm Akre Capital Management disclosed its portfolio for the fourth quarter of 2020 earlier this week.

The Virginia-based firm, which was founded by renowned investor Chuck Akre (Trades, Portfolio), takes a "three-legged stool" approach to stock picking, in which the portfolio managers look for companies that have a strong business model and good management teams that effectively reinvest free cash flow.

Keeping these criteria in mind, the firm' largest trades for the quarter included boosts to the American Tower Corp. (AMT, Financial) and CoStar Group Inc. (CSGP, Financial) positions and reductions of the Markel Corp. (MKL, Financial), Brookfield Asset Management Inc. (BAM, Financial) and Primo Water Corp. (PRMW, Financial) holdings. It did not establish any new investments during the three months ended Dec. 31 nor divest of any existing positions.

American Tower

Akre Capital increased its American Tower (AMT, Financial) stake by 1.38%, buying 97,189 shares. The trade had an impact of 0.15% on the equity portfolio. The stock traded for an average price of $232.32 per share during the quarter.

The firm now holds 7.13 million shares total, which represent 10.82% of the equity portfolio and is its third-largest holding. GuruFocus estimates it has gained 151.56% on the investment.

The Boston-based real estate investment trust, which owns wireless and broadband communications infrastructure, has a $101.23 billion market cap; its shares were trading around $227.33 on Friday with a price-earnings ratio of 53.87, a price-book ratio of 27.13 and a price-sales ratio of 12.95.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 2 out of 10 also supports this assessment.

GuruFocus rated American Tower's financial strength 3 out of 10. As a result of issuing approximately $5.1 billion in new long-term debt over the past three years, the company has inadequate interest coverage. The Altman Z-Score of 1.98 also indicates the company is under some pressure.

The company's profitability fared much better, scoring a 9 out of 10 rating. Although the operating margin is in decline, American Tower is being supported by strong returns that outperform a majority of competitors as well as a moderate Piotroski F-Score of 5, which indicates business conditions are stable. The predictability rank of 4.5 out of five stars is also on watch as a result of revenue per share growth slowing down over the past 12 months. According to GuruFocus, companies with this rank return an average of 10.6% annually over a 10-year period.

Of the gurus invested in American Tower, Akre's firm has the largest stake with 1.61% of outstanding shares. Other major guru shareholders of the REIT include Ken Fisher (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Spiros Segalas (Trades, Portfolio) and David Carlson (Trades, Portfolio).

CoStar Group

With an impact of 0.04% on the equity portfolio, the firm increased its CoStar Group (CSGP, Financial) holding by 0.75%, buying 7,168 shares. Shares traded for an average price of $876.98 each during the quarter.

It now holds 965,961 shares total, accounting for 6.03% of the equity portfolio and is now the firm's fifth-largest holding. GuruFocus data shows the firm has gained an estimated 47.64% on the investment since the fourth quarter of 2019.

Headquartered in Washington D.C., the company, which provides commercial real estate and marketplace listing platforms, has a market cap of $36.71 billion; its shares were trading around $935.03 on Friday with a price-earnings ratio of 125.01, a price-book ratio of 6.9 and a price-sales ratio of 22.07.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 also supports this assessment since the share price and price-sales ratio are both approaching 10-year highs.

CoStar's financial strength was rated 7 out of 10 by GuruFocus on the back of a comfortable level of interest coverage as well as a robust Altman Z-Score of 15.86. The return on invested capital also surpasses the weighted average cost of capital, indicating good value creation.

The company's profitability scored an 8 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a large majority of industry peers and a moderate Piotroski F-Score of 6. Due to consistent revenue and earnings growth, CoStar has a 4.5-star predictability rank.

With a 5.08% stake, Ron Baron (Trades, Portfolio) is the company's largest guru shareholder. Frank Sands (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Pioneer, Wallace Weitz (Trades, Portfolio), Jerome Dodson (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Simons' firm, Ray Dalio (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also own the stock.

Markel

Akre's firm reduced its Markel (MKL, Financial) holding by 34.5%, selling 163,630 shares. The transaction had an impact of -1.12% on the equity portfolio. During the quarter, the stock traded for an average per-share price of $997.31.

The firm now holds 310,600 shares total, making up 2.17% of the equity portfolio. GuruFocus data shows it has gained around 93.87% on the investment.

The Glen Allen, Virginia-based holding company, which has insurance, reinsurance and investment operations, has a $15.32 billion market cap; its shares were trading around $1,111.20 on Friday with a price-earnings ratio of 20.02, a price-book ratio of 1.2 and a price-sales ratio of 1.59.

Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 7 out of 10, however, leans more toward undervaluation.

GuruFocus rated Markel's financial strength 4 out of 10. Despite issuing approximately $1 billion in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. Assets are also building up at a faster rate than revenue is growing, suggesting it is becoming less efficient. The WACC also eclipses the ROIC, indicating poor value creation.

The company's profitability fared better with a 7 out of 10 rating on the back of strong margins and returns that outperform over half of its competitors. Markel also has a high Piotroski F-Score of 7, suggesting business conditions are healthy. Despite having steady earnings and revenue growth, however, the three-star predictability rank is on watch. GuruFocus says companies with this rating return an average of 8.2% annually.

Akre Capital is the company's largest guru shareholder with a 2.25% stake. Chris Davis (Trades, Portfolio), Simons' firm, Weitz, Cohen, Jeremy Grantham (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Tom Russo (Trades, Portfolio), Pioneer, Jones and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.

Brookfield Asset Management

Impacting the equity portfolio by -0.12%, the firm reduced its stake in Brookfield Asset Management (BAM, Financial) by 3.69%, selling 500,000 shares. The stock traded for an average price of $37.46 per share during the quarter.

Akre Capital now holds 13.04 million shares total, which were given 3.64% space in the equity portfolio. GuruFocus data shows the firm has gained around 25.4% on the investment so far.

The Canadian asset management company has a market cap of $64.46 billion; its shares were trading around $42.60 on Friday with a price-book ratio of 2.17 and a price-sales ratio of 0.98.

The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 9 out of 10, however, suggests undervaluation even though the share price and price ratios are nearing 10-year highs.

Brookfield's financial strength was rated 3 out of 10 by GuruFocus. As a result of issuing approximately $62.8 billion in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 0.56 also warns the company could be in danger of going bankrupt if it does not improve its liquidity position. The WACC also surpasses the ROIC, indicating issues creating value.

The company's profitability fared much better, scoring an 8 out of 10 rating even though the operating margin is in decline. Brookfield also has poor returns that underperform over half of its industry peers as well as a moderate Piotroski F-Score of 5. As a result of revenue per share declining over the past year, the four-star predictability rank is on watch. GuruFocus says companies with this rank return an average of 9.8% annually.

Akre is the company's largest guru shareholder with 0.86% of outstanding shares. Other top guru investors are Tom Gayner (Trades, Portfolio), Baron, Stahl, Third Avenue Management (Trades, Portfolio), Simons' firm, Pioneer, Grantham, Mario Gabelli (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Dalio and Fisher.

Primo Water

Akre Capital reduced its Primo Water (PRMW, Financial) holding by 94.69%, selling 532,700shares. The transaction had an impact of -0.06% on the equity portfolio. During the quarter, shares traded for an average price of $14.74 each.

The firm now holds 29,899 shares total. GuruFocus data shows it has lost an estimated 1.39% on the investment.

The Atlanta-based company, which offers filtered water dispensers and other purification systems, has a $2.77 billion market cap; its shares were trading around $17.28 on Friday with a price-book ratio of 1.97 and a price-sales ratio of 0.95.

According to the median price-sales value chart, the stock is overvalued. The GuruFocus valuation rank of 4 out of 10 also supports this assessment since the share price and price-sales ratio are both nearing multiyear highs.

GuruFocus rated Primo Water's financial strength 4 out of 10 on the back of poor interest coverage and a low Altman Z-Score of 1.36, which indicates the company could be in danger of going bankrupt. The ROIC is also below the WACC, indicating issues with creating value.

The company's profitability scored a 5 out of 10 rating, driven by an expanding operating margin. Primo's returns, however, are negative and underperform a majority of competitors. It is also supported by a moderate Piotroski F-Score of 4, but the one-star predictability rank is on watch. GuruFocus data shows companies with this rank return, on average, 1.1% annually.

Simons' firm has the largest stake in Primo Water with 1.10% of outstanding shares. Gabelli, Chuck Royce (Trades, Portfolio), Jones and Dalio also have positions in the stock.

Additional trades and portfolio performance

During the quarter, Akre Capital also trimmed its holdings of CarMax Inc. (KMX, Financial), Dollar Tree Inc. (DLTR, Financial), KKR & Co. Inc. (KKR, Financial), Mastercard Inc. (MA, Financial), Moody's Corp. (MCO, Financial), O'Reilly Automotive Inc. (ORLY, Financial), Roper Technologies Inc. (ROP) and Visa Inc. (V).

The firm's $14.8 billion equity portfolio, which is composed of 28 stocks, is heavily invested in the financial services sector with 43.07% exposure. The real estate (21.93%) and consumer cyclical (10.4%) spaces have slightly smaller representations.

GuruFocus data shows the firm returned 20.37% in 2020, outperforming the S&P 500's return of 16.26%.

Disclosure: No positions.