Howard Marks of Oaktree Capital's Top Q3 Picks: CIT, CMCSA,VSH
Marks believes that outsized returns in good times do not prove a manager’s skill, but rather the manager’s level of performance in bad times.
The underlying technical aspects of businesses matter to Marks’ in his investing decisions, not the ever-changing macro picture, but he noted in one of his recent commentaries how their perspective on the financial crisis has increased their cautiousness: “For our purposes, it suffices that we have operated since the financial crisis under the assumption that the recovery would be sluggish, rather than V-shaped. We still feel that way. And that feeling is inconsistent with moving out on the risk curve or down in credit quality, investing more in cyclicals or taking on leverage.”
Oaktree reported its third-quarter portfolio on Tuesday, which included 12 new stocks. Their top buys were: CIT Group Inc. (CIT), Comcast Corp. (CMCSA), Vishay Intertechnology Inc. (VSH).
Most of these stocks Marks has owned before at higher prices, and now re-added after they fell to much cheaper prices in the third quarter.
CIT Group Inc. (CIT)
CIT was Marks’ largest new buy in the third quarter. He purchased 8,905,434 shares at an average price of $36.03 per share. He previously purchased 8,715,434 shares in the first quarter of 2011, and sold out in the second quarter. He also owned 8,715,434 shares in the third quarter of 2010, and sold out in the fourth quarter of 2010. Financials comprise just 6% of Mark’s portfolio of 43 stocks.
CIT Group, the company that filed for bankruptcy in 2009 in spite of massive government bailout funds, reported a loss for the third quarter but that it had made progress. The loss totaled $16 million or 8 cents per share, compared with a profit of $226 million, or 58 cents per share the prior year. Most of the loss, as well as a $3.5 billion decrease in assets, was attributable to debt restructuring and early repayments to creditors.
Loans and leases increased 8% year over year to $1.9 billion.CIT is also hoping to raise funds from its newly launched online banking during the quarter, which was raising deposits after only five days, according to the earnings call.
In February 2010, CIT elected John Thain as new chairman and CEO to it as it emerged from reorganization. Thain previously served as chairman and CEO if Merrill Lynch before its sale to Bank of America.
In 2010, the first year after emerging from bankruptcy, CIT’s revenue was $6.4 billion, net income was $517 million and earnings per share was $2.58. In the trailing 12 months, it has reported revenue of $5.5 billion, net income was $224 million, and earnings per share was $1.12.
Comcast Corp. (CMCSA)
Marks previously purchased 2,389,500 shares of Comcast in the third quarter of 2010 at an average price of $18.25, and added 275,000 in the first quarter of 2011 at an average price of $23.97. He sold all of his shares in the second quarter 2011 when the price appreciated to $24.77. When it got cheaper in the third quarter of 2011, he purchased 1,889,500 shares at an average price of $22.57.
Comcast has been generating steadily increasing cash flow since 2005. In 2009 it reported free cash flow of $5.2 billion, which increased to a record $6.2 billion in 2010. Similarly revenue has climbed each year since 2001. In 2009 it was $35.8 billion, which increased to $38 billion in 2010. Margins have remained quite stable in recent years as well. Comcast initiated a dividend in 2008 of 19 cents in 2008, which it has increased each year, most recently paying out 35 cents per share in 2010.
Moreover, second quarter revenue, reported June 30, 2011, continued the trend. It increased 50.5% year over year to $14.3 billion. Free cash flow increased 12.2%, and earnings per share went up 19.4%.
In July, NBCUniversal funneled some of that cash to fund its acquisition of Blackstone Group’s 50% interest in Universal Orlando. It also used borrowings from its existing credit facility and a one-year $250 million note to pay for the $3.165 billion transaction. NBCUniversal now owns 100% of Universal Studios Florida, Universal’s Islands of Adventure and Universal CityWalk which are located at Universal Orlando.
Vishay Intertechnology Inc. (VSH)
Vishay Intertechnology Inc. is a leading international manufacturer and supplier of discrete passive electronic components and discrete active electronic components, particularly resistors, capacitors, inductors, diodes and transistors. The company offers its customers one-stop access to one of the most comprehensive electronic component lines of any manufacturer in the United States or Europe. Passive electronic components, discrete active electronic components and integrated circuits are the primary elements of every electronic circuit.
Revenue at Vishay has been growing fairly steadily over the last decade, with the exception of 2009, when it dropped 27.6%. The recession negatively impacted it in the first quarters of 2009, but by 2009, a dramatic increase in end demand for electronic components began. Vishay responded to the downturn in business by implementing major restructuring and right-sizing efforts. Its goal was to generate free cash, at which it succeeded – in spite of the decrease in revenue it generated $246 million in free cash flow, its highest except for 2002.
By the end of 2009, demand in many of its key markets, such as automotive, industrial and consumer, began to return. In 2010, Vishay’s revenue was back to pre-recession levels at $2.7 billion, and gross margins were their highest in a 10-year financial history, at 29.6%. Net margins also improved from negative 2.8% in 2009 to 13.2% in 2010, and operating margins improved from negative 1.9% to 15.3% in the same time period.
Vishay’s has more cash than debt on its balance sheet, with $1 billion in cash and $976 million in long-term liabilities and debt.
The company’s stock price became especially cheap over the second half of 2011, falling to a 52-week low of $7.94 in October from a 52-week high of $19.36 in May.
Marks previously owned 1,500 shares of 1.5 million shares of Vishay which he purchased at $16.98 per share and sold at roughly the same price the next quarter. When the price fell to $12.1 in the third quarter, he acquired 2,750,000 shares.