Undervalued stocks investor, Arnold Schneider III of Pennsylvania-based Schneider Capital Management, has recently reported 63 transactions in his third quarter portfolio update. The transactions consisted of the following:
|Additions to Current Shares||20|
|Reductions to Current Shares||22|
With more than 124 stocks in his portfolio, and a quarter-over-quarter turnover rate of 10 percent, Schneider Capital manages about $1.7 billion in assets as of Sept. 30, according to its website.
With the majority large cap stocks, Shneider Capital targets undervalued securities that have a market cap of $1 billion or greater, with potential for positive change.
In the funds’ third quarter investment review, the firm provided detailed analyses of several of its holdings, including the bank, homebuilder, coal, oil and gas and technology sectors.
Below are three stock reductions in the third quarter that made the most impact to Schneider’s portfolio.
KB Home (NYSE:KBH)
Schneider reduced his holding of homebuilding company, KB Home (NYSE:KBH) by 59.22 percent, which created the most impact out of his portfolio. In Schneider’s third quarter investment review, the firm shared the following sentiment about its homebuilding stocks:
“We believe public homebuilders are in the early phase of a durable recovery. Housing fundamentals continued to improve during the quarter. Strong sales figures and low and declining inventory levels indicate solid progress on the residential real estate front. Existing home inventory is down to a more normal six months. Nationally, housing prices are rising slightly for the first time in six years, which is a positive factor for land values and homebuilder profitability. The stocks have had a good run since last fall, but they continue to offer significant upside. “
With a market cap of $1.21 billion, KB Home is currently trading at $14.58 per share, a value reflective of the recovery that Schneider spoke of as its price continues to rise in a one-year time frame. Its share price is relatively lower than its homebuilder stock counterparts such as Lennar Corp. (NYSE:LEN), Caltex Australia Ltd. (NYSE:CTX) and MDC Holdings Inc. (NYSE:MDC).
KBH data by GuruFocus.com
Data in its 10-Year Financials shows KB Home’s declining revenue at a negative rate of 11.9 percent in the past 10 years, as well as a dividend yield close to its five-year low and its price ratios trading at their three-year highs.
Ranking low in Business Predictability, KB Home maintains a Financial Strength rank of 6 out of 10 and a Profitability & Growth rank of 5 out of 10 on GuruFocus
Schneider shared his outlook for its homebuilding holdings for 2013 in its third quarter investment review:
“We expect that U.S. economic growth next year will be supported by a sustained rebound in housing. Housing fundamentals showed solid improvement year-to-date, and the pieces for a more sustainable recovery are now falling into place. Housing is no longer a drag as residential investment has now contributed modestly to U.S. economic output for the past five quarters. A continued upward trend of rising home prices should bolster the net worth of homeowners, reduce the likelihood of defaults, and improve overall consumer confidence and spending trends. “
RenaissanceRe Holdings Ltd. (NYSE:RNR)
Schneider reduced its RenaissanceRe Holdings Ltd. (NYSE:RNR) shares by 74.6 percent in the third quarter, selling about 144,000 shares at an average price of $75.72.
This transaction brings Schneider’s holding down to a total of a little over 49,000 shares from the 193,000 shares it reported in the second quarter of this year.
RenaissanceRe is a global provider of property catastrophe and specialty reinsurance, as well as other insurance coverages, according to its website.
With a market cap of $3.97 billion, RenaissanceRe belongs in the financial services sector, which accounts for the largest sector represented in Schneider’s portfolio at 41.3 percent, on top of consumer goods at 17.1 percent and basic materials at 10.5 percent, according to its current portfolio statistics.
The firm’s mention of the financial sector in its third quarter investment review mostly targeted banks, stating:
“Bank fundamentals continue to strengthen, and our regional and money center bank holdings remain undervalued. Earnings from improved credit quality continue to boost already-high capital levels, and our banks continue to control expenses and take actions to efficiently grow loan balances and revenues. Banks have the potential to generate enormous amounts of excess capital in coming years that should enable them to increase dividend payments and repurchase a significant percentage of their share base.”
Reflectively, RenaissanceRe shows a positive trend line in its revenue per share data on GuruFocus 10-Year Financials; its revenue growth rate in the past 10 years is 8.3 percent.
It upholds a 1-star Business Predictability rank, and both its Financial Strength and Profitability and Growth ranks are 6 out of 10; it is currently trading close to its 10-year high at $79.41 per share.
While its only Good Sign reveals a P/E ratio close to a 10-year low, its four Severe Warning signs highlight its declining per share revenue and gross margin, as well as its divergent cash flow and accumulation of sales outstanding.
Besides Schneider, other Guru investors who reduced their shares of RenaissanceRe include Richard Pzena and Jim Simons in the third quarter, as well as Chase Coleman, RS Investment Mangement and Steven Cohen in the second quarter.
To view RenaissanceRe’s holding history with other Gurus, visit RNR: Holding History.
Consol Energy Inc. (NYSE:CNX)
Schneider reduced his share of Pittsburgh-based coal and natural gas producer, Consol Energy Inc. (NYSE:CNX), by 67.45 percent in the third quarter. The transaction totaled about 264,000 shares sold at an average price of $30.76.
This places Schneider at a current holding of almost 130,000 shares of Consol Energy, compared to its 382,000 shares reported in the second quarter of this year.
Schneider’s comment in its third quarter investment review about coal and natural gas producers stateing:
“Our conviction level remains high for a turnaround in the fortunes of U.S. thermal coal producers. Production levels have declined this year in response to the temporary weakness in demand. Higher seasonal demand during the summer combined with these production cuts have begun to bring bloated thermal coal inventories back in the right direction. The rebalancing of domestic supply and demand, combined with healthy long-term growth in global coal demand as the lowest cost electricity source, should provide support for higher coal prices. Our holdings, which are focused on thermal coal producers in the Powder River Basin, occupy the lower range of the production cost curve. These firms should have tremendous earnings leverage when thermal coal prices recover and production rebounds from depressed levels
A higher natural gas price is the most direct path to an uptrend in coal earnings, and we are encouraged that the gas rig count has fallen by more than one-half since last fall. Spot gas prices have rebounded strongly from the April 2012 low and are at a level that ends the painful Powder River Basin coal-to-gas switching trend that began last winter.”
Consol Energy is currently trading at $32.85 per share, with a market cap of $7.5 billion, a P/E (ttm) ratio close to a three-year low of 17.3, a P/B ratio of 2 and a P/S ratio of 1.2.
While its revenue has been on an upward trend in the last five years, one Warning Sign indicates that its revenue per share has been in decline for the past 12 months.
Consol Energy has a business predictability rank of 2.5 out of 5 stars on GuruFocus, as well as Financial Strength rank of 5 out of 10 and a Profitability and Growth rank of 9 out of 10.
Besides Schneider, other Gurus that have either reduced or sold out of its shares as of the second quarter include Mason Hawkins, Steven Cohen and Ronald Muhlenkamp.
To view its holding history with other Gurus, visit CNX: Holding History.
View the rest of Arnold Schneider’s portfolio here. Also view a list of his top growth stocks, undervalued stocks and high yield stocks.