Bill Nygren, portfolio manager of the highly profitable Oakmark Funds, is a dedicated value investor. He and his partners analyze companies in depth looking for ideal stock price discounts, free cash flows, intelligent reinvestment of cash, and levels of management ownership. With a 7% return for the first half of the year, Nygren’s fund is beating the S&P by 1%.
New points of focus going forward:
Large-cap stocks (“Big is Beautiful”)
· People who invested in the 50 largest cap companies in the S&P 500 at its peak in 2000 have lost 12% of their initial investment. Small- and mid-cap stocks have gained 125% each.
· Many investors who made this mistake are now trying to correct it by going back to large-cap companies, but he believes this is misguided.
· The largest companies in 2000 were trading at an average of 40 times earnings, a premium of 150%. Today, the 50 largest sell for 14 times earnings and a 7% discount to the other 450 companies in the S&P 500, setting them up to achieve better performance over the long term.
· Oakmark now owns 36% of the largest cap stocks on the S&P.
Strong balance sheets
· Nygren believes they have been overlooked.
· Strong balance sheets represent hiding earnings power.
· “Given today’s low interest rates and below-average P/E ratios, earnings typically increase when managements invest their cash or borrow to invest.”
· Oakmark is ignoring the ever-changing macro picture and instead looking for: share repurchases, modest P/E ratios, strong corporate balance sheets, improving earnings, higher dividends and low returns on competing investments.
Nygren’s top holdings as of June 30, 2011 are Comcast Cl A (NASDAQ:CMCSK), TE Connectivity (NYSE:TEL), MasterCard Cl A.
Comcast CL A (NASDAQ:CMCSK)
Comcast Corporation is principally involved in the development, management and operation of broadband cable networks, and in the provision of electronic commerce and programming content. It has a P/E ratio of 17.6, and the dividend yield of its special stocks is 1.9%. Comcast Corp. Special had an annual average earnings growth of 14.9% over the past 10 years.
Comcast is a model Nygren stock based on the criteria delineated in his quarterly letter. Its cash flow has seen a dramatic rebound from its $1.5 billion loss in 2003. It has generated more every year, reporting $5.4 billion in 2010. And it has made sure that more cash goes to shareholders. Comcast increased its dividend by 80% in three years and repurchased $4.8 billion of stock, with plans to purchase $2.1 billion more in 2011.
Increased cash came in large part due to a boost from Comcast’s acquisition a controlling stake in NBCUniversal from GE (GE) in the first quarter 2011. The acquired business produced $4.3 billion of revenue for Comcast in the first quarter 2011. Total liabilities, however, jumped from $7.4 billion in the fourth quarter 2010 to $107.7 billion in the first quarter 2011. But Nygren said in his letter leveraged investments are no problem with his fund if they are invested to create more value in the business.
Comcast accounts for 2.4% of the Oakmark Fund.
TE Connectivity (NYSE:TEL)
TE Connectivity Ltd., formerly known as Tyco Electronics Ltd., designs and manufactures products that connect the flow of power and data in a variety of industries. TE Connectivity has a market cap of $15.83 billion; its shares were traded at around $35.99 with a P/E ratio of 12.5 and P/S ratio of 1.3. The dividend yield of TE Connectivity stocks is 2%.
TE Connectivity, public since 2007, has competitors such as Alcatel-Lucent, Molex and Corning. It has four segments that accounted for certain percentages of sales in 2010: electronic components (67%), network solutions (14%), specialty products (13%) and subsea communications (6%). Overall the company increased sales 17.7% in 2010 over 2009. Free cash in 2010 was a record $1.3 billion.
TE Connectivity invested a fair amount of its extra cash in acquisitions throughout 2010. It purchased PLanarMag Inc., certain assets of the Optical Products Group of Zarlink Semiconductor Inc. and Sensitive Object, a touch-enabling software company. It divested several other companies and has plans to acquire at least one more company in 2011.
Dividends were another investment the company made with its growing assets. From 2007 – 2010 its dividend increased from 14 cents to 64 cents.
TE Connectivity accounts for 2.1% of Nygren’s Oakmark Fund.
MasterCard Cl A (NYSE:MA)
MasterCard Inc. advances global commerce by providing a critical economic link among financial institutions, businesses, cardholders and merchants worldwide. Mastercard Cl A has a market cap of $38.92 billion; its shares were traded at around $305.89 with a P/E ratio of 20.6 and P/S ratio of 7. The dividend yield of MasterCard Cl A stocks is 0.2%.
MasterCard was especially famous this quarter for being the only purchase of Warren Buffett. Nygren got the stock cheaper in the second quarter 2010 when he bought 170,000 shares at $227.79 per share. Every quarter since then he has added shares. He profited enormously from the holding, considering the stock jumped 11% in a single day in late June when the Fed announced it would cut debit-card swipe fees far less than expected. The announcement was only a kick to the price that had risen at least 30% over the year to that point.
MasterCard has the strong balance sheet Nygren looks for. It has built up the cash on its balance sheet from $1.5 billion in 2008, to $2 billion in 2009 and $3 billion in 2010. Just $100 invested in MasterCard’s Class A common stock would be worth $494 at the end of 2010, vs. $109 for the S&P. Dividends, however, have sat at 60 cents and a 20% yield every year since 2007.
Investor Chuck Akre pointed to MasterCard’s net margin – 37% as of the first quarter 2011 – as an indicator of the stock’s future potential. “So the key then is reinvestment,” Akre said in a June GuruFocus interview. “It will be very hard to find things to spend their money on that have the types of returns that they already developed internally!”
MasterCard Cl A is 2.1% of Nygren’s Oakmark Fund Portfolio.
Check out the rest of Bill Nygren's portfolio here.