John Rogers' Ariel Investments Overview and top holdings: JLL, GCI, LAZ, MHK, IPG
Ariel Investments offers four primary mutual funds with the following investment profiles:
A. Ariel Fund – Small to mid cap value
B. Ariel Appreciation Fund – Mid cap value
C. Ariel Focus Fund- Mid to large cap value
D. Ariel Discovery Fund – Small cap, deep value
In order to maximize value for their shareholders, the firm believes in 3 core principles:
A. Patient View
Ariel Investments prefers to sit on the sidelines and wait for the right opportunity then to invest into subpar equities. They look for firms that have strong cash flows, low debt, high quality products and low reinvestment requirements. Furthermore, Rogers prefer companies with double digit growth, strong management, and solid financials. Specifically stated, Rogers look for investment opportunities that have a margin of safety of approximately 40% from calculated value, and trades at 13 times or less forward earnings.
B. Focused Approach
Ariel Investments utilizes extensive proprietary research to develop profiles on targeted equities and the sectors they operate in. This allows the firm to make investments with greater conviction, or to reduce positions in equities with more problems then simply seen in the financial statements. Lists of key and important catalysts are yielded with each equity, in order to further minimize market noise. With the knowledge of both the firm and sector yielded, this allows the firm to invest deeply rather then broadly, and to concentrate their holdings into a focused grouping of names and industries.
C. Team of independent thinkers
Utilizing a contrarian approach to investing, the firm believes in buying high quality equities that have fallen out favor for one reason or another. Specifically, the firm prefers to buy what others are selling and sell when others are buying, to take advantage of market psychology. Original proprietary research and financial models have been developed by the firm to conduct due diligence on targeted equities.
“At Ariel, we believe that strong financial results do not have to come at the expense of social integrity”
Unlike many funds, Ariel Investments believes in social responsibility when it comes to investments. That is, the firm will not invest in companies that primarily produce or sell tobacco products, and gun manufacturers. The reason for this abstinence is because they feel that “these industries are more likely to face shrinking growth prospects, draining litigation costs and legal liabilities that cannot be quantified”. In addition, the firm analyzes companies for their environmental policy, as the firm feels that companies with sound policies are less likely to be scrutinized by the government. Rogers prefers companies to be strong corporate citizens with a dedication to the community and to be proactive in diversity practices.
The Ariel Focus Fund will be utilized as the basis of comparison against the benchmark due to its investment profile. Since its inception, the fund has a annualized return of 2.51%, while the S&P 500 has returned 3.46% annually for the same period. The three year annualized return parallels the underperformance seen since inception, at a return of 2.82% vs. the benchmark’s 2.92%. Year to date however, the fund has returned 5.09%, while the S&P has returned 3.87% for the same period.
Looking forward, the firm acknowledges that sentiment in the market have seesawed, largely due to global macro events such as the ongoing Greek debt crisis, the ever changing prices of oil, and the instability present in the US housing market. With that in mind, Ariel Investments note that when the stock market is surging in gains month after month with the aforementioned crisis’s occurring, it is time to become “more cautious” in their investments. While the aforementioned seesawing did provide several buying opportunities for the firm, the firm is utilizing a cautious outlook to guide their investment decisions.
The following charts and tables demonstrate the sector breakdown of all equities held, and the top five holdings of the firm as of the end of Q2 per the firm’s 13F filing. As can be seen in the table, 83.40% of the firm’s aggregate holdings are concentrated into consumer services, financials, consumer goods, and industrials. The rebalancing changes from quarter to quarter are minor in nature, with the greatest change occurring with a reduction in consumer services at 2.80%. Ariel Investments as a whole manages approximately $5.38 billion, in 117 equities. The top 5 holdings, due to the large number of equities held across all of the firm’s different funds, only comprise 16.86% of the aggregate portfolio. The top four holdings saw a reduction in shares held across the board, and on the same note, are all trending at a capital loss from the original purchase price. Conversely, IPG is the only holding of the top five that simultaneously saw an increase in shares held, along with a positive capital gain with respect to purchase price.
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Jones Lang LaSalle (JLL)
Jones Lang LaSalle is an investment management firm operating primarily in the real estate markets. Shares of JLL closed at $61.86 with a market capitalization of $2.69 billion. Rogers accumulated shares of JLL at an estimated price of $82.67, yielding a potential capital loss of approximately 25%. Jones Lang LaSalle is the largest holding of the firm, at 3.64% of all equities held. From quarter to quarter, Rogers reduced his holdings of JLL by 1.57%.
JLL has a P/E ratio of 16.41, a P/B ratio of 1.77 and a P/S ratio of .97. Revenues for the year totaled in at approximately $2.92 billion, with a net income of $154 million, yielding a net margin of 5.28%. Earnings for the same period were reported at $3.77, with a current dividend yield of .48%. Historically, JLL has grown its revenues and free cash flow annually by 13.1% and 16.8% over the last 10 years.
Jones Lang LaSalle recently sold a Times Square retail property to a joint venture of investors for approximately $136 million. In other news, JLL secured a $205 million loan from MetLife as financing for the Crescent office complex in Dallas.
GuruFocus rated JLL with the business predictability rank of 2.5 stars.
Gannet Company (GCI)
Gannet is a content provider and media company operating through mediums such as TV and print, with flagship brands such as USATODAY. GCI’s share prices closed at $10.44, with a market capitalization of $2.51 billion. The average cost of each share of GCI in the portfolio is estimated at $13.82, yielding a potential capital loss of approximately 24.4%.Rogers reduced his holdings of GCI by 8.61% quarter to quarter, with GCI now accounting as the 2nd largest holding of the firm, at 3.47% of all equities held.
GCI has a P/E ratio of 4.90, a P/B ratio of 1.24 and a P/S ratio of .49. Gannet reported a net income of $601 million on revenues of $5.4 billion, yielding an 11.07% margin. Earnings were approximately $2.13, with a dividend yield of 3.07%. Historically, GCI has grown its revenues by an annual rate of .5% over the last 10 years.
Gannet is currently in the midst of a dispute with their Indianapolis branch’s union regarding pay. In other developments, Gannet is teaming up with Yahoo! to expand local advertising to all of their division markets.
GuruFocus rated GCI with the business predictability rank of 1 star.
Lazard LTD (LAZ)
Lazard Limited is an asset management firm operating through two business segments: Financial Advisory and Asset Management. LAZ currently trades at $27.16, with a market capitalization of $3.27 billion. The cost of acquisition per share of LAZ is estimated at $36.23, yielding a capital loss of approximately 25%. Rogers reduced his holdings of Lazard by 1.02% quarter to quarter. Currently, Lazard is the third largest holding of the firm, at 3.28% of all equities held.
LAZ has a P/E ratio of 12.42, a P/B ratio of 4.91 and a P/S ratio of 1.71. Revenues for the year topped $2 billion, with a net margin of approximately 9.71%. Earnings per share were $2.19, with a dividend yield of $2.36. Over the last 5 years, on an annual basis, Lazard has grown its free cash flow by 4.5%.
Lazard was recently awarded a contract to help Chilean department store, Empresas La Polar SA, to undergo financial restructuring.
Mohawk Industries (MHK)
Mohawk Industries provides floor furnishings ranging from carpets to hardwood flooring. Shares of Mohawk Industries closed at $48.01 with a market capitalization of $3.30 billion. MHK was acquired by Rogers at an estimated cost of $57.86, yielding a potential capital loss of 17%. From quarter to quarter, Rogers reduced his holdings of Mohawk Industries by 1.53%.
MHK has a P/E ratio of 18.25, a P/B ratio of 1.04 and a P/S ratio of .64. MHK reported earnings of $2.63 per share for the FY of 2010. The bottom line income for the firm was reported at $189 million on revenues of $5.3 billion, yielding a profit margin of approximately 3.57%. In terms of historical growth rates, MHK has on average, grown its revenues and free cash flow by approximately 2.9% and 3.4% respectively over the last 10 years.
Georgia Trend magazine recently rated Mohawk Industries as one of the Top 100 Public Companies in the state. However, MHK has announced for the third quarter of 2011, for earnings to fall between $.82 and $.91 per share, well below analyst expectations of $.95 per share.
GuruFocus rated MHK with the business predictability rank of 1 star.
Interpublic Group (IPG)
The Interpublic Group is a global marketing company providing services such as consumer advertising, digital marketing and public relations. IPG closed at $7.85, with a market capitalization of $3.76 billion. Rogers paid an average price of $7.12 per share of IPG, yielding a potential capital gain of 10.3%. Rogers increased his holdings of IPG by 1.98% from Q1 to Q2.
IPG has a P/E ratio of 14.55, a P/B ratio of 1.74 and a P/S ratio of .60. Revenues of $6.5 billion were reported for the fiscal year of 2010, with a net income at $279 million, yielding a profit margin of approximately 4.28%. Earnings for the year totaled in at $.54 per share, with a dividend yield currently standing at 3.06%. IPG has on average, grown its free cash flow by 4.5% annually, over the last 5 years. Book value has also grown at an annual rate of 3.8% for the same period.
Recently, the firm sold off half of its stake in Facebook for a sum of approximately $133 million. Furthermore, they announced their intent to increase the magnitude of their stock repurchase program to $450 million from $300 million.
GuruFocus rated IPG with the business predictability rank of 1 star.
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