In his second-quarter letter, Dalio said he believed global equity markets were pricing in “fairly pessimistic” long-term earnings growth rates and the worst real earnings growth rate in 100 years, while companies still “retain plenty of ability to protect their operating margins and profitability by keeping labor costs down,” despite global financial conditions posing a headwind to top-line revenue growth. He also noted that the dividend yield of U.S. non-financial corporation is higher than U.S. government note yields for only the second time in the past 50 years, and companies had ample liquidity to cover their dividends.
These are Dalio’s biggest new stock purchases in the second quarter: iShares MSCI Brazil Index (ETF) (EWZ), Cliffs Natural Resources (CLF), Honeywell International (HON) and Las Vegas Sands (LVS).
Dalio’s firm bought 2,002,700 shares of the largest new buy, iShares MSCI Brazil Index (EWZ) at an average price of $56 in the second quarter. The holding now has a 1.5% weighting in Bridgewater’s portfolio. The stock dropped more than $20 from its year-to-date peak in the first quarter to its year-to-date trough in the second quarter, when Dalio bought it.
The top stocks within the MSCI Brazil Index Fund are Petrobras (PBR), Itau Unibanco (ITUB) and Vale (VALE). Its last year’s return was a loss of 26.85%, and its three-year return was 3.08%.
Dalio commented in his second quarter letter that the quarter was negative for most emerging market debt, and that declines in commodity prices, particularly oil, “contributed to the slight underperformance in Indonesia, Brazil and Russia.” He also said Japan and emerging markets underperformed the world equity markets during the period, with returns well below the global average.
Dalio is expressly optimistic about emerging markets: Forty-three percent of it is invested in emerging markets ETFs, including his new Brazil Index purchase.
Dalio had closed out his firm’s position in his largest new buy, Cliffs Natural Resources (CLF), in the first quarter of 2012 at an average price of $69. In the second quarter, he bought 248,138 shares as the price dropped to an average of $56. The stock dropped more than 30% year to date, giving the company a P/E ratio of 5.2.
Cliffs Natural Resources is an international mining and natural resources company that produces iron ore and high and low-volatile metallurgical coal. It is focused on world’s largest and fastest-growing steel markets. Its share price began to decline in April after the company reported disappointing earnings results. In the first quarter, the company’s net income was $376, down from $423 million in the first quarter of 2011. The decrease was primarily due to lower sales margin and higher foreign currency contracts gains in the first quarter of 2011. Iron ore prices were also down, contributing to a 29% decrease in U.S. iron ore revenues per ton. Iron ore revenues were down in each of its geographic segments.
The second quarter likewise had declines in key areas. Revenues in the quarter declined 10% year over year driven by lower year-over-year pricing for its commodity products. The company’s sales margin also declined 39% driven by higher labor, mining and maintenance expenses. Iron ore sales volumes, however, increased 13%, while U.S. iron ore revenues fell 13% due mainly due to lower prices.
Iron ore prices in 2012 have fallen from $140.35 per U.S. metric ton in January to $127.94 per metric ton in July.
In his letter, Dalio did not mention iron ore specifically but said of commodities: “Most commodities sold off in the second quarter, led by declines in oil and extractive metals… Weakening global growth and growth prospects were a significant bearing development for extractive commodities in the second quarter, contributing to the broad-based price declines.”
Dalio purchased 212,695 shares of Honeywell International (HON) at an average price of $57 in the second quarter. He had previously sold out a smaller position in the fourth quarter of 2011 at an average price of $52. The stock has advanced more than 25% over the last year.
Honeywell is a technology and manufacturing company serving the aerospace, automotive, specialty chemical, power generation and several other industries. In the last ten years the company has increased revenue per share at an annual rate of 6.5% and EBITDA at 11.7%. The company has increased the amount of cash on its balance sheet to $11.5 billion, its highest ever level of $11.5 billion, and decreased its long-term liability and debt level to $15.3 billion, from $16.6 billion in 2011.
In its second quarter of 2012, Honeywell posted increase in sales and profits for each of its segments except Transportation Systems, where sales declined 9% and profit declined 12%. Lower production of light vehicles in Europe and lower aftermarket sales contributed to the decrease.
Honeywell lowered the range for its full-year 2012 guidance to $37.8 billion to $38.4 billion, from its previously expected range of $38 billion to $38.6 billion.
Dalio’s fourth-largest new position is a 0.18% weighting in Las Vegas Sands Corp. (LVS). He bought 272,134 shares of the company at an average price of $51. The stock has since dropped 25% from that price.
Las Vegas Sands has produced strong revenue and EBITDA growth at a rate of 17.4% and 14.7%, respectively, over the last 10 years, but had not produced free cash flow for a year in the last decade until 2011, when it generated $1.2 billion.
In the second quarter, Las Vegas Sands’ revenues increased year over year for all of its segments except “convention, retail and other” and overall net revenue was up 10.1%. But the results did not meet the company’s expectations, being impacted by lower hold on table games play, higher provisions for accounts receivable at Marina Bay Sands in Singapore and higher legal expenses from last year’s second quarter. The company’s adjusted earnings per diluted share were $0.44, compared to $0.54 last year. Weighing on earnings were the same issues affecting revenue.
The company’s growth slowed in China, with a net income for its Sands China Ltd. in the quarter decreasing 40$ to $160.5 million, from $267.4 million the prior year, on higher-than-expected opening expenses for its Cotai Central and an impairment charge on two new land parcels of $100.8 million.
Dalio’s next-largest new buys are Google (GOOG), Unum Group (UNM) and Advanced Micro Devices (AMD). See Dalio’s stock portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Ray Dalio.