Bill Nygren (Trades, Portfolio) released his first quarter commentary on Wednesday in which he discussed his two new positions acquired during the quarter, Caterpillar Inc. (CAT, Financial) and Precisions Castparts Corp. (PCP, Financial), and reported that he sold his position in Walmart (WMT, Financial).
Nygren has not yet reported the details of his first quarter trading activity.
In spite of the paltry buying, Nygren also mentioned in his letter why Oakmark Fund still liked stocks:
“The Oakmark Fund declined 1% in the first quarter of 2015, and it lagged behind the 1% gain for the S&P 500. Falling oil prices and the strengthening U.S. dollar captured investor attention and brought heightened volatility to company earnings and stock prices during the first quarter. With interest rates near multi-year lows, however, we feel that equities remain the most attractive asset class.”
Caterpillar Inc. (CAT, Financial)
Nygren purchased Caterpillar at $81 per share. The company’s shares closed at $80.44 on Wednesday, down 12.1% since the start of the year.
Nygren commented on the company:
Caterpillar is the world’s largest provider of construction equipment, diesel engines and industrial gas turbines. Caterpillar’s products earn high marks, as do the quality and scope of its dealer network, but the company has considerable exposure to the highly cyclical and currently depressed oil and gas and mining segments. With substantial pressure from weak energy spending and the negative impact of the strong U.S. dollar, Caterpillar’s 2015 earnings will likely be down considerably from 2014 and toward the bottom end of their cyclical range. We prefer to value cyclical businesses on their earnings potential throughout the cycle, and we think that Caterpillar’s mid-cycle earnings will be considerably higher than current levels. With the Caterpillar share price falling to multi-year lows, the business is now attractively valued at just 10x our forecast of mid-cycle earnings. When we combine this attractive valuation with a 3.4% dividend yield and a strong balance sheet, we find Caterpillar to be a compelling investment.
Precision Castparts Corp. (PCP, Financial)
Nygren bought Precision Castparts Corp. shares at $212. Shares closed at $214 on Wednesday, down 11% year to date.
Nygren commented in his letter on the company:
“Precision Castparts Corp. (PCP) is a manufacturer of complex metal components and products, including castings, forgings, fasteners and aerostructures for aerospace, power generation and general industrial applications. Precision Castparts enjoys what we believe is an outstanding corporate culture and is led by a long-tenured CEO who is known for aggressively pursuing operating efficiencies. For many years, the company’s stock traded at a significant premium to other aerospace and industrial peers, but recent weakness has brought the share price to attractive levels relative to these industry groups and the S&P 500. We believe the current valuation of less than 15x earnings is overly punitive, considering PCP’s organic growth prospects and the company’s ability to add value through acquisitions. PCP is providing more components on key new airplanes, which should allow the company to outgrow its end markets. In addition, management projects $4 billion-$6 billion of acquisition opportunities over the next couple of years with return characteristics similar to its existing business. Finally, the company’s unique technical and process capabilities, coupled with its efficiently run operations, should allow it to continue to generate above-average margins. We are pleased to have the opportunity to add shares of what we consider a best-in-class company at a price that implies it is only average.”
Oakmark also left behind a position in Walmart “because its share price appreciated toward our estimate of intrinsic value,” Nygren wrote.
Over the past five years, Walmart shares rose almost 46% to close at $81.03 on Wednesday.
Nygren initiated a position in the company in the first quarter of 2010 when the price averaged $54 per share. He held 3,105,000 shares at fourth quarter-end, which encompassed 1.6% of the portfolio.
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