Analysis of Bill Nygren and His Top Holdings: CMCSA, TEL, MA, COF, LINTA
The stated objective of the Oakmark Fund is simply to “seek long-term capital appreciation.” In order to execute this mission, the firm relies upon three key tenets:
1. Buy businesses at a significant discount from true intrinsic price.
2. Invest in firms that are growing in terms of both earnings and operations, generate positive free cash flow, and manage both cash and investments exceptionally.
3. Look for management teams that focus on maximizing shareholder value and growth.
The firm utilizes in-house research in conjunction with company visits and industry analysis to render a more complete report of prospective investments. Nygren believes that over time, the “price of a stock will rise to reflect the value of the underlying company.” and views ownership as not simply that of a certificate, but that of the entire business. A bottoms-up approach is utilized to analyze investments in greater depth, with macroeconomics and market sentiment discarded due to Nygren’s style. Nygren believes that a concentrated portfolio is superior to a more diversified portfolio because each investment thus has a more “meaningful impact of investment performance.” As such, the Oakmark Fund typically holds between 15-60 equities. Furthermore, as paralleled in the third philosophical tenet of the firm, the fund employees and their families have aligned their interest with their own shareholders by investing over $260 million into the funds.
The following chart demonstrates the year by year performance of the fund vs. the S&P 500. In terms of recent performance, the fund outperformed the benchmark by 4.39% in 2008 and in 2009 by 18.27%. However, in 2010, the fund underperformed by a margin of 2.30%. Year to date, the fund is currently trending a loss of 8.31%, while the benchmark is trending a positive return of approximately 3.87%. In terms of annualized growth, the fund has an annualized return of .93% over the last five years, and 4.13% over the last 10 years. Comparatively speaking, the benchmark has returned 1.80% and 1.16% for the same period. Since the fund’s inception in 1991, the fund has returned an average rate of 11.51% annually.
In the firm’s outlook, Nygren, like many of his peers restate the severity of the possibility of a U.S. debt default along with a European default. To compound that problem, inflation is rising, while interest rates continuously remain low. With such low yields, one would expect the flight to equities, but due to a fear so pervasive, many believe buy and hold are dysfunctional strategies. Nonetheless, Nygren states that many companies are currently “attractively priced” in the current market and sees numerous opportunities to be had. He notes, however, the difficulty felt in the financial oriented equities is primarily attributed to increasing regulatory issues, and the inherent nature of financial firms to have leveraged balance sheets. As such, though there are financial firms that are attractively priced, due to the usage of risk-adjusted reward metrics, he prefers investments in other equities all things equal. However, Nygren is bullish on technology, as he feels they are selling at large discounts, thus making them as Nygren so eloquently stated, both “great businesses, great investments.”
The following charts and tables demonstrate the top sector and equity holdings as of Q3 of 2011 per the firm’s 13F’s filing. The Oakmark Fund manages approximately $4.06 billion in 57 equities. Over 50% of the fund’s holdings are invested into consumer discretionary and information technology. Financials and health care also make up a large portion of the fund’s holdings. From quarter to quarter, the sector holdings of the firm did not change drastically, with no change exceeding .70% in magnitude. In terms of their top five holdings, all positions remained static in terms of shares held. In sum, they comprise 11.43% of the all equities held by the fund.
Comcast Corporation (CMCSA)
The Comcast Corporation provides internet, phone, and television services to their consumers. Their shares trade at $23.85, with a market capitalization of $65.67 billion. Nygren paid an average price of $15.90 per share of Comcast, yielding a potential capital gain of 50%. From quarter to quarter, the overall position remained static, but, Comcast remains the largest holding of the fund, at 2.52% of all equities held.
CMCSA has a P/E ratio of 17.35, a P/S ratio of 1.77, and a P/B ratio of 1.54. Earnings for the year were reported at $1.37 per share, with a dividend currently yielding 1.89%. Sales of $37.9 billion were reported, with a net income of $3.66 billion, rendering a profit margin of 9.67%. Over the last 10 years, on average, Comcast has grown its revenues by 17.5%. In terms of free cash flow growth, it has averaged around 8.4% for the same period.
Comcast is currently considered as a potential strategic partner in a possible spinoff of Yahoo!’s assets. In other news, Nomura Securities reaffirmed its “buy” rating on Comcast with a price target of $32, a 25.4% premium for its current closing price, while JPMorgan placed a $30 price target, a 25.7% premium. Comcast was also awarded the Fastest Internet Service Provider designation in the nation by PC Magazine.
GuruFocus rated CMCSA with the business predictability rank of 2 stars.
TE Connectivity (TEL)
TE Connectivity manufactures products that protect the flow of power and data through three operating segments: Transportation Solutions, Communications/Industrial Solutions, and Network Solutions. Their shares trade at $36.34, with a market capitalization of $15.75 billion. The average cost of TEL in the portfolio is $27.92, yielding a profit margin of approximately 30.1%. TEL is the second-largest holding of the firm, at 2.38% of all equities held. No shares were purchased between the third quarter and the second quarter.
TEL has a P/E ratio of 13.83, a P/S ratio of 1.29, and a P/B ratio of 2.27. TE Connectivity reported a net income of $1.06 billion on revenues of $12.07 billion, an 8.82% margin. Earnings totaled in at $2.63 per share, with a dividend yield of 1.98%. On average, over the last five years, TE Connectivity has grown its free cash flow by 8.9%.
TE Connectivity, in conjunction with Juice Technologies, is rolling out a product that allows those with electric vehicles to monitor electrical consumption via a cord and socket. In other news, TEL is joining the S&P 500 index, replacing Cephalon (CEPH) in the process.
MasterCard provides payment solutions to both consumers and merchants alike through the usage of electronic payment options. Their shares closed at $354.58, with a market capitalization of $45.05 billion. MA was acquired at an average cost of $225.53, yielding a capital gain of 57.22%. MasterCard is the third-largest holding of the firm, at 2.23% of all equities held. The holdings of the firm remained consistent quarter to quarter.
MasterCard has a P/E ratio of 21.98, a P/S ratio of 8.01, and a P/B ratio of 8.78. MasterCard posted a 33.35% profit margin on revenues of $5.53 billion for the year. Earnings per share were reported at $16.13, with a minor dividend yield of .17%. MasterCard has on average, grown its revenues and free cash flow by 14.1% and 9.1% respectively, over the last five years.
MasterCard recently obtained the right to manage the debit-card operations of Huntington Bancshares, as it seeks to increase their presence in the debit market. However, several banks and firms such as Visa (V) and MasterCard are engaged in lawsuits due to the allegation that their ATM practices are considered “anti-competitive.”
Capital One (COF)
Capital One Financial is a financial services company offering banking services through three operational segments: Credit, Consumer Banking, and Commercial Banking. COF trades at $46.90, with a market capitalization of $21.54 billion. Nygren acquired each share of COF at approximately $38.91, yielding a capital gain of 20.53%. Nygren did not change his holdings of Capital One Financial quarter to quarter.
Capital One Financial has a P/E ratio of 6.08, a P/S ratio of 1.32, and a P/B ratio of .80. Earnings for the year were $7.72 per share, with a dividend yield of .43%. Furthermore, a net income of $3.05 billion was earned upon revenues of $15.35 billion, an 18.86% margin. Its revenues and free cash flow has historically grown at rates of .5% and 17.5% respectively, over the last 10 years.
Capital One stated that in September, their late-payment rate increased to 3.65% on their credit cards, a streak that has continued for four months. Nonetheless, the firm posted earnings of $1.77 per share, besting expectations of $1.68 per share. In other news, Capital One is currently in the midst of attempting to generate support for an acquisition of online bank, ING Direct.
GuruFocus rated COF with the business predictability rank of 1 star.
Liberty Media (LINTA)
Liberty Media provides video and online business services through three segments: Leisure, TripAdvisor Media, and Egencia. Their shares recently closed at $16.66, with a market capitalization of $10.02 billion. LINTA’s average cost in the portfolio is $9.41, yielding a potential capital gain of 77%. The position of LINTA remained static quarter to quarter.
Liberty Media has a P/E ratio of 13.88, a P/S ratio of 1.11, and a P/B ratio of 1.57. Revenues for the year topped $8.9 billion, with a bottom line profit of $919 million, yielding a margin of 10.29%. Earnings for the same period were $1.20, with no dividend paid out to investors. LINTA has grown its revenues on average by 19.4% yearly over the last 10 years.
Citigroup recently upgraded Liberty Media from “hold” to “buy.” In terms of company developments, Christopher Shean has been promoted to the CFO of Liberty Media.
GuruFocus rated LINTA with the business predictability rank of 1 star.
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