Steven Romick, portfolio manager at the FPA Crescent Fund, rarely misses the low point to buy a good value stock. Only two of the stocks from his portfolio have fallen to below his purchase price: Arris Group Inc. (ARRS) and Oracle Corp. (ORCL).
Romick only bought two stocks in the first quarter, and has not been much of a buyer since the summer and fall of 2011 because he has not seen enough market volatility necessary to create opportunities. In his first quarter letter, he described the market and his purchasing plans as follows:
Though the players involved may change from one generation to the next, investing at its core is, and always will be, nothing more than a tug of war between fear and greed…
At the moment, the side pulling the “greed” end of the rope would seem to have the momentum, so as you can guess we have been feeding them some of our slack. Rest assured however, this is a tug of war that never ends, and while we don’t know when it will happen, “fear” will eventually turn the tide in the future, just as it has in the past. At that point we will rise each morning and put our well rested muscles to work by once again actively deploying capital.
Here is an overview of the two stocks that have become even cheaper since Steven Romick considered them bargains.
Oracle Corp. (ORCL)
Romick holds 6,164,600 shares of Oracle Corp., which he purchased from the second quarter of 2012 through the first quarter of 2013. Most recently, he paid $34.78 per share on average in the first quarter. The price has since declined by 13.2% to $30.14 per share at midday Tuesday.
Though still up 8.5% for the past year, Oracle’s stock plunged about 13% in June. The cause was largely its weak earnings report, released June 20, in which it posted a fourth quarter revenue of $10.9, unchanged from the previous fourth quarter, and net income up 10% to $3.8 billion.
Though sales at its new software licenses and cloud software subscriptions were up 1%, sales in software license updates and product support increased 6% and sales in software increased 4% year over year in U.S. dollars, revenue declined 9% in its hardware systems, and services revenues declined 9%.
The company, which is busy transitioning to a more cloud-based business, grew its HCM Cloud, CRM Cloud and ERP Cloud business grow 50% during the quarter.
Oracle generated free cash flow of $13.1 billion in the fourth quarter, compared to $13.57 billion a year previously.
In the fourth quarter it increased its dividend by 100% to $0.12 per common share quarterly. A $12 billion common stock repurchase was also declared.
Oracle’s revenue growth has slowed over recent years though earnings continue to increase. This is its 10-year price, revenue, earnings and P/E history:
Oracle currently trades at some notably low valuations. It has a near 10-year low P/E of 13.02, near 10-year low P/B of 3.25 and a P/S of 4. The Peter Lynch chart indicates that it is about fairly valued:
Arris Group Inc. (ARRS)
Romick has delved into 4,168,000 shares of ARRIS Group Inc., purchasing the majority of the holding in the fourth quarter of 2011 at $11 per share. He added 720,800 shares in the first quarter of 2013 after the price rose to $17 per share. Midday Tuesday shares trade for 13.9% less, at $14.41 each.
As a global communications technology company, ARRIS focuses on broadband network services used by residential and business customers. Broadband operators use its tools to provide telephony, video, advertising and high speed data.
The company’s stock began falling in May, around the time that it held its May 15 second quarter preview conference call. The company announced it expects second quarter pro-forma non-GAAP sales guidance of $1.028 billion to $1.078 billion, a slight decline from pro-forma non-GAAP sales of $1.105 billion in sales it reported in the first quarter.
It also announced that its first half of 2013 would fall below its target run rate. “Two years of Motorola Home’s pending business transition has caused internal distractions and reluctance from the customers to enter into product commitments and new programs,” it said in its presentation to investors.
The second half of the year should improve, it said, with uniformly positive customer reaction to its new ARRIS and several new initiatives set to launch in the second half, as well as an improving market and healthy product pipeline.
ARRIS has completely reorganized its business this year. Instead of seven segments between it and Motorola, it has combined everything into two segments: network and cloud, and CPE.
Below is ARRIS’s 10-year price, revenue and earnings history:
The Peter Lynch chart indicates that ARRIS is overvalued:
It also has a P/B ratio close to a one-year low, at 1.74. Its P/E is 52.3 and P/B is 1.7.
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