Since the fund’s inception in 1992, Herro has returned 10.52% to investors on average annually, compared to 6.24% for its benchmark MSCI World Index ex US. In the fourth quarter, the fund returned 14%, beating the 6% of the MSCI World ex U.S. Index, and placing it at 29% for the year, compared to 16% for the MSCI World ex U.S. Index.
Oakmark International is composed of a diversified portfolio of common stocks of non-U.S. companies, concentrated on mid- and large-cap companies. Herro seeks good, undervalued companies, defining “undervalued” as “selling at extremely low prices but are also very high in quality,” he said in an interview on the fund’s website. It has two general phases:
1. Analytical – finding the correct valuation of the company
2. Portfolio construction – finding the companies with the highest expected rate of return, biggest upside, or biggest discount to the intrinsic value and making them the biggest positions in the portfolio
In the quarter ended Dec. 31, 2012, Herro selected three new stocks matching his criteria: Christian Dior SA (CDI.France), Hennes & Mauritz AB (HM B.Sweden)(HNNMY) and Check Point Software Technologies Ltd. (NASDAQ:CHKP).
Christian Dior SA (CDI.France)
Herro bought 96,000 shares of French luxury goods manufacturer Christian Dior SA for $17 per share on average in the fourth quarter. This gives it a 0.16% weighting in his portfolio of 55 stocks. The company’s stock price has advanced just over 9% in the past year and is close to its 10-year high.
Based in Paris, Christian Dior reported revenue of 22.8 billion euros in the nine months ending Jan. 31, 2012, representing a 14% increase from the same period the previous year. Couture sales increased 19%, and retail sales increased 24%. Sales at Louis Vuitton (LVMH), of which Dior owns 42.36% of outstanding shares, increased 14%, including strong performance in wines and spirits, fashion and leather goods, perfumes, watches and jewelry, DFS and Sephora.
For the year ending Dec. 31, 2012, Dior’s revenue jumped 19% to 29.3 billion euros from the previous year, including the integration of Bulgari beginning June 30, 2011. Net profit also increased 12% to 3.89 billion, and free cash flow grew 14% to 2.45 billion euros.
LVMH reported a 19% revenue increase, with global market share gains, growth in U.S. and Asia, and strong performance in wines and spirits, fashion and leather goods, perfumes, DFS and Sephora and Tag Heuer.
Dior has a P/E of 57.2, which is near a 10-year high. Its dividend yield at 2.17% is near a one-year low.
Hennes & Mauritz AB (HM B.Sweden)
Herro purchased 1,187,000 shares of Hennes & Mauritz in the fourth quarter. It holds a 0.39% weighting in the portfolio. Last year, the company’s stock gained 0.09% and trades for SEK230.60 per share on Monday, near a two-year high.
Hennes & Mauritz is the owner of H&M retail stores, and five other independent brands. The group’s sales in the three months ended Feb. 28, 2013, increased in local currencies by 6%, mitigated 2% by calendar effects. Its profit after financial items was SEK3.23 billion, negatively impacted by long-term investments and negative currency translation effects.
The sales numbers did not meet the company’s expectations due largely to the macro-economic climate and unfavorable weather. It is increasing the rate of its expansion, planning 350 new stores for 2013 instead of the previously expected 325. It will launch new stores in Chila, Estonia, Lithuania, Serbia and Indonesia in 2013, and Australia in 2014.
H&M has two valuation ratios at one-year lows as of Monday: P/E (22.52) and P/B (8.65). Its dividend yield at 2.88% is near a three-year low.
Check Point Software Technologies Ltd. (NASDAQ:CHKP)
Herro bought 2,733,000 shares of Check Point Software Technologies at an average price of $46 per share. His largest new position, the holding has a 1.25% weighting in his portfolio. Check Point Software’s share price has declined 27% in the past year and trades for $46.20 per share on Monday.
Check Point is the world’s second-largest IT security company, and Oakmark International Fund’s only Middle East exposure.
In 2012, Check Point reported $1.34 billion in revenue, an 8% increase from the previous year. Cash flow increased 14% to $815.8 million, and GAAP net income increased 14% to $620 million. The company repurchased 9.5 million shares for $466.2 million during the year, a 55% increase from the previous year.
Check Point’s P/E of 15.63 is close to a three-year low, and its P/B ratio of 2.82 is close to a two-year low.
See more of David Herro’s trades in his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of David Herro.