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Jeremy Grantham’s Biggest Fourth-Quarter Buys: PGN, RRR, LAVA, GFI

February 13, 2012 | About:
Holly LaFon

Holly LaFon

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Jeremy Grantham is one of the founders of GMO, a global investment management firm with over $96 billion in assets under management. He has keen insight into the markets and has been able to call bubbles before they burst. In his fourth-quarter investor letter, he gave a grim view of the economy, calling it “no market for young men,” because younger investors do not understand that it takes much longer than they think, typically takes 14 years, for a market to recover after an equity bubble bursts. As a result, he advised investors to avoid lower quality U.S. stocks, lean toward safety and invest in resources in the ground on a 10-year horizon. His portfolio contains 724 stocks, of which 133 are new buys this quarter. His top new buys are: Progress Energy Inc. (PGN), RSC Holdings (RRR), Magma Design Automation Inc. (LAVA) and Gold Fields Ltd. ADS (GFI).

Progress Energy Inc. (PGN)

Progress Energy shares climbed over 2011 as the company announced in January it would merge with Duke Energy. Together, they will form the nation’s largest utility with a combined enterprise value of $65 billion and $37 billion in market cap. The new company will have 57 gigawatts of domestic generating capacity through a mix of coal, nuclear, natural gas, oil and renewable resources. Progress energy shareholders will receive an approximately 3 percent dividend increase.

Incidentally, development of a comprehensive energy policy was one of what Grantham called “the most important and most dangerous issues” facing the world.

Progress is at the forefront of the push for nuclear energy in the U.S., which has been deemed the “nuclear renaissance.” Thirty-five percent of the electricity used by Progress Energy customers comes from one of their four nuclear sites, two in North Carolina, and one each in South Carolina and Florida. It plans to build another reactor in Levy County, Florida.

Revenue at Progress Energy has declined at a 2.6% annual rate over the past five years, and it achieved cash flow of $95 million in 2010, after three years of losses. Earnings have remained positive, reaching a record for the decade of $856 million in 2010.

RSC Holdings (RRR)

RSC is a machinery rental service for construction, industrial, petrochemical, governmental and manufacturing businesses in the U.S. and Canada. RSC tends to benefit in economic downturns, as more businesses turn to renting rather than buying equipment to cut costs. Rented equipment rose 20.7% percent (the sixth consecutive quarter of double-digit growth) and rental revenue increased 27% in the fourth quarter of 2011, compared to last year.

United Rentals (URI), one of RSC’s largest competitors, had a rental revenue increase of 18.5% in the fourth quarter compared to last year, which included a 6.7% increase in rental rates.

The company’s fleet utilization also increased to 69% for 2010, up 510 bps from 2010, and it spent $616 million in gross rental capital expenditures to keep up with demand.

Part of the growth is a result of management’s decision in 2006 to expand beyond the cyclical construction market to the largely untapped non-construction and industrial markets that need machinery for mining and oil and gas drilling.

RSC Holdings has a market cap of $2.26 billion; its shares were traded at around $22.15 with a P/E ratio of 197.91 and P/S ratio of 1.49.

Magma Design Automation Inc. (LAVA)

Magma Design Automation is a Silicon-Valley company that develops electronic design automation software products and solutions, from concept to completion. It has had relatively flat free cash flow growth for the last ten years and an average annual earnings growth of 1.8%.

On November 30, it announced it was going to be acquired by Synopsys Inc., for $7.35 per share, or $507 million net of cash and debt. Shareholders sued the company on December 1 saying that the sell price was too low, as it closed as high as $8.50 per share in July 2011 and analysts had set price targets at up to $11.00 per share.

Grantham bought 1,663,500 shares of the company at an average price of $5.70 in the fourth quarter.

Gold Fields Ltd. ADS (GFI)

Grantham, who usually eschews gold stocks, bought four gold miners in the fourth quarter, the largest of which is Gold Fields Ltd. (GFI). In 2010, Grantham stated his Buffett-like position on gold in his quarterly letter, saying, “Everyone asks about gold. This is the irony: just as Jim Grant tells us (correctly) that we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal. It pays no dividend, cannot be eaten, and is mostly used for nothing more useful than jewelry. I would say that anything of which 75% sits idly and expensively in bank vaults is, as a measure of value, only one step up from the Polynesian islands that attached value to certain well-known large rocks that were traded. But only one step up. I own some personally, but really more for amusement and speculation than for serious investing. It may well work and it may not. In the longer run, I believe that resources in the ground, forestry, agriculture, common stocks, and even real estate are more certain to resist any inflation or paper currency crisis than is gold.”

Gold Fields is a New Zealand-based miner with 76.7 million ounces of reserves, free cash flow of $346 million in the third quarter, a net debt to EBITDA ratio of 0.42 times, with one of the highest dividend yields in the sector. It is also unhedged and offers full exposure to the price of gold.

Gold Fields is aiming to increase its international diversification. In 2008, 62% of its production came from South Africa, and by 2015 it hopes to reduce that to 40%. South American production is helping take its place, growing from 2% in 2008, and projected to reach 20% by 2015. Australian production made up 18% of its total in 2008, and is projected to grow to 20% in 2015. According to Maplecroft’s Resource Nationalism Index 2012, five of the ten highest-risk countries for mining are in Sub-Saharan Africa, and nationalism has been named as one of the top ten risks in mining for 2011-2012.

The company’s revenue per share has grown at a rate of 10.3% over the last 10 years, and free cash flow recently turned positive, $133 million in 2011, after seven previous years of negative results. There is $1.5 billion in cash on its balance sheet and approximately $2.8 billion in long-term liabilities and debt.

See Grantham’s complete portfolio here. Also check out his Undervalued Stocks, Top Growth Companies and High Yield stocks.


Rating: 4.3/5 (6 votes)

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