|Adds to Current Shares||14|
|Reductions to Current Shares||4|
Nygren completely disposed of all his shares of two companies. Alcohol beverage company, Diageo Plc (DEO)’s strong performance and surge in value during the quarter led to its demise from the fund, while electronics retailer, Best Buy Co. Inc. (BBY) produced disappointing business performance, as well as a lack of correspondence from its management when the company’s founder expressed an interest in purchasing the entire company, actions that led Nygren to believe were not in the shareholders’ best interest.
On the other hand, Oak Mark introduced three companies to its portfolio: United Health Group Inc. (UNH), Principal Financial Group (PFG) and Cummins Inc. (CMI). The purchase of Cummins Inc. stock made the most impact to the portfolio in the third quarter.
Currently, there are 56 stocks managed in The Oak Mark Fund, a total value of $6.3 billion, and a quarter-over-quarter turnover rate of 9 percent. The fund produced an average total return of 17.25 percent in the last year, as of Oct. 31 (oakmark.com). In three months, its average total return was 5.35 percent.
The financial sector makes up the largest portion of the portfolio, with consumer services and industrials trailing behind it in second and third place. (See sector weighting here)
Nygren’s top holdings are: JP Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Capital One Financial Corp. (COF) and Comcast Corp. (CMCSA).
Below are descriptions of Nygrens’ three new companies, along with commentary about the stocks from The Oak Mark Fund’s third quarter letter to shareholders.
UnitedHealth Group Inc. (UNH)
With a market cap of $55.69 billion, Minnesota-based UnitedHealth Group is a provider or healthcare products and services, such as health care coverage and technology-enabled health services.
It is currently trading at $54.49 per share, its stock up for this afternoon’s trading. Its dividend yield is 1.6 percent, and its dividend payout ratio is 0.16.
Nygren and Grant expect UnitedHealth to earn over $5 per share this year, more than double its earnings from seven years ago, at $2.48 per share in 2005, continuing the flourishing trend line it maintains now.
In the shareholder letter, they stated:
“Managed-care companies have fallen to below-average multiples because investors fear that health care reform will hurt these businesses significantly. We believe that fear is misplaced. We think the government needs companies like UNH because using the existing managed-care networks is far less expensive than building a new one, and UNH's breadth should allow it to thrive in most scenarios. UNH revenues grow with medical costs, supplemented by market share gains and an aging population that requires more spending on health care.”
UnitedHealth ranks high in Profitability & Growth at 8 out of 10 on GuruFocus. It has a Business Predictability rank of 3.5 stars and a Financial Strength of 7 out of 10.
To review UnitedHealth Group’s financial data, visit its 10-Year Financials.
Principal Financial Group (PFG)
Headquartered in Des Moines, Ia., Principal Financial is financial services provider offering retirement services, insurance solutions and asset management to its clients. It was founded in 1879, a member of the FORTUNE 500, and has offices in Asia, Australia, Europe and Latin America, besides the U.S.
With its price close to a one-year high, Principal Financial is trading at $26.97.
Nygren and Grant says the stock is priced like a “less attractive insurer.” They also believe that investors right now do not necessarily favor financial services stocks, which urged the two to take full advantage. In the shareholder letter, they stated:
“Today, the stock sells at about 85% of expected year-end book value and at less than 9x expected 2013 earnings. Assets under management have been growing nicely; inflows alone account for a mid-single-digit growth rate. Because of Principal’s strength in asset accumulation in emerging markets, we believe that growth rate is sustainable.”
PFG data by GuruFocus.com
Since 2009, Principal Financials’ tangibles book per share value has displayed a positive trend line. Additionally, its dividend yield has increased to three percent from the company repurchasing its shares each year.
Principal Financial is ranked one star in Business Predictability, and 6 out 10 in both Financial Strength and Profitability and Growth.
To review Principal Financials’ fiscal data, visit 10-Year Financials.
Cummins Inc. (CMI)
As a power company, Cummins Inc. manufactures, distributes and services engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems.
It is currently trading at $98.32 per share, with its stock down almost two percent today.
Nygren and Grant view Cummins as a leader in emissions controls, especially since countries are mandating tighter emissions standards in upcoming years. The managers observed that the company earned just over $9 per share last year, its stock reaching a three-year high of $130 in March, before tumbling back down in July to about $82.
CMI data by GuruFocus.com
In the shareholder letter, Nygren and Grant explained:
“Investors became increasingly concerned about the possibility of decreasing global growth… We believe the decline was an overreaction. Cummins now sells at about 9x expected current-year earnings. Like many of our holdings, we expect Cummins to achieve mid-single-digit revenue growth over the economic cycle, and expect per-share growth to be higher as excess cash flow is devoted to share repurchase.”
Cummins’ revenue growth has been extraordinary, expanding at a rate of 9.2 percent in the last 10 years, 7.7 percent in the last five years, and 17.8 percent in the last 12 months. Its five-year earnings per share growth rate sits confidently at 23.92 percent.
GuruFocus ranks Cummins four stars in Business Predictability, and 9 out of 10 in both Financial Strength and Profitability and Growth.
To review Cummins Inc.’s financial data, visit 10-Year Financials.
View the rest of Bill Nygren’s portfolio updates here. Also view his undervalued stocks, his top growth companies and his high yield stocks.