Throughout the second quarter, gurus and mutual funds bought and sold stocks trading in American, European and Asian markets. Spiros Segalas (Trades, Portfolio), manager of Harbor Capital Appreciation Fund, mainly trades within the U.S. market while two other funds predominantly invest in European and Asian stocks.
Harbor Capital Appreciation Fund
Segalas, president and chief investment officer of Jennison Associates LLC, started the Capital Appreciation Fund Dec. 29, 1987. Since inception, the fund realized average annual total returns of 11.13%. To formulate his winning investment strategy, Segalas scrutinizes a company’s historical balance sheets and earnings performance. The Jennison Associates president only invests in the stocks that have historically performed well; such companies have strong balance sheets, sales momentum and high profitability history or potential. Using the All-in-One Guru Screener, Segalas could generate the following screener based on his investment strategy:
- The company has at least a 3-star predictability rank.
- The company’s financial strength rating is at least 6 out of 10.
- Gross margin growth rate is greater than 5%.
- The company’s profitability and growth rating is at least 7 out of 10.
For the quarter ended March 31, the mutual fund had the highest portfolio weight in Amazon.com Inc. (AMZN, Financial), one of the stocks that met all of the criteria above. In his first quarter commentary, the portfolio manager shared his view on “pursuing faster growth in consumer stocks.” The major online retailer presents a unique, well-positioned business model, according to the Jennison Associates chief investment officer.
During the first four months of 2016, Segalas bought 2,133,213 shares of L Brands Inc. (LB, Financial) and 673,131 shares of Constellation Brands Inc. (STE, Financial), increasing his holdings by 0.66% and 0.43%. A women’s apparel store, L Brands experienced expanding operating margins and consistent per share revenue growth, which likely resulted in a profitability and growth rating of 9. While the retail firm has a modest financial strength rating of 5, L Brands has a strong Piotroski F-score of 8. Barrow, Hanley, Mewhinney & Strauss, who currently owns 2,422,881 shares of L Brands, raised its position in the stock by 0.15% during the past quarter.
After increasing his position in Microsoft Corp. (MSFT, Financial) by 45.11%, Segalas currently owns 12,150,736 shares of the software company. While the company has financial strength and profitability rankings of 7 out of 10, an earlier article suggests that Microsoft is a value trap. Additionally, the portfolio manager increased his positions in Industria De Diseno Textil SA (XMCE:ITX, Financial) and The Home Depot Inc. (HD, Financial) by 18.64% and 39.85%. Both companies, especially Home Depot, have high profitability rankings with expanding operating margins and per share revenue.
On the sell side, Segalas made two major trades: the portfolio manager removed 13.98% of his Facebook Inc. (FB, Financial) position and wiped out his position in LinkedIn Corp. (LNKD, Financial). While Facebook produced high returns for the fund, LinkedIn suffered from cautious forecasts and product concerns. Additionally, Microsoft announced an all-cash acquisition of LinkedIn for $26.2 billion in late June, which likely worsened LinkedIn’s business outlook. In the first quarter, four other gurus eliminated LinkedIn completely: RS Investment Management (Trades, Portfolio), John Griffin (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Ron Baron (Trades, Portfolio).
Segalas also closed his positions in ARM Holdings PLC (ARM, Financial) and Vertex Pharmaceuticals Inc. (VRTX, Financial) during the first four months of 2016. With a profitability ranking of just 5, the biotechnology firm lost its appeal to the Harbor Capital Appreciation Fund’s manager.
Invesco European Growth Fund (Trades, Portfolio)
Like the Harbor Capital Appreciation Fund, the Invesco European Growth Fund (Trades, Portfolio) predominantly invests in growth stocks. Commenced November 1997, the equity fund targets European stocks with sustainable earnings and high financial strength.
The fund made one new buy during the past four months, investing in 406,202 shares of Hays PLC (LSE:HAS). Incorporated in England and Wales in July 1987, the employment services company has expanding operating margins and a high Piotroski F-score, suggesting value and growth potential. While Hays had declining returns on equity from mid-2006 to mid-2010, the firm’s current ROE outperforms 92% of global staffing and outsourcing companies.
In addition to buying Hays, Invesco added 41.69%, 21.8% and 13.53% to its positions in Roche Holding AG (XSWX:ROG), Investor AB (OSTO:INVE B) and Haci Omer Sabanci Holding AS (IST:SAHOL). Among these stocks, Sabanci represents 2.77% of the European Growth Fund’s portfolio, which currently contains 11,153,719 shares of the Turkish bank. The bank’s financial outlook is relatively weak: although the bank has expanding operating margins, the company has low Piotroski F-scores and equity-to-asset ratios. Since Altman Z-scores do not apply to financial companies, the Z-score of -0.02 is not meaningful. GuruFocus gives the Turkish bank a financial strength rating of 4 out of 10, suggesting that Sabanci has a moderately unsustainable business operation.
On the other hand, Roche Holding has a strong business operation with financial strength and profitability rankings of 6 out of 10. Despite having contracting operating margins during the past five years, the Swiss biotechnology firm has profitability margins currently in the top 10% of global biotechnology firms. Roche’s operating margin outperforms 90% of biotech firms while its ROE and Greenblatt return on capital outperform 98% and 92%.
On the sell side, the Invesco European Growth Fund (Trades, Portfolio) trimmed 29.72%, 10.95% and 100% of its positions in Anheuser-Busch Inbev SA (XBRU:ABI), British American Tobacco (LSE:BATS) and The Swatch Group AG (XSWX:UHR). The mutual fund also wiped out its position in Amlin PLC (LSE:AML), a British property and casualty insurance company.
While the Belgian beverage company has high dividend yields and expanding operating margins, Anheuser-Busch has a weak Piotroski F-score and a high dividend payout ratio. During the past five years, the Belgian firm had weakening F-scores, and the company’s Altman Z-score seldom climbed out of distress zones. With interest coverage that underperforms 61% of global beverage brewing companies, Anheuser-Busch received a modest financial strength rating of 5.
Hennessy Japan Fund (Trades, Portfolio)
Like the other two mutual funds, the Hennessy Japan Fund (Trades, Portfolio) invests in large growth stocks with “strong business and management,” according to its website. Such stocks present Hennessy’s managers with significant “value gap” opportunities.
During the past four months, the mutual fund increased its position in ASICS Corp. (TSE:7936), Nidec Corp. (TSE:6594) and Pigeon Corp. (TSE:7956) by 6.77%, 4.27% and 5.32%. Among these three stocks, Pigeon has the highest number of guru buys, likely due to a strong financial outlook. With a financial strength rating of 8 and a profitability rating of 7, the Japanese packaged goods company has high growth and value potential. While the company has a modest Piotroski F-score of 4, Pigeon has a strong Altman Z-score and interest coverage. Currently, Pigeon’s interest coverage outperforms 82% of global household and personal products companies. Furthermore, the company’s return on invested capital is significantly higher than its WACC, suggesting that Pigeon creates value as it grows.
As the company’s financials strengthen, Hennessy and other gurus increase their positions in Pigeon. T. Rowe Price Japan Fund (Trades, Portfolio) added 32.75% to its position in the stock. Matthews Japan Fund (Trades, Portfolio), who currently owns 2,724,700 shares, increased its position by 36.65%. Additionally, Matthews Japan Fund (Trades, Portfolio) currently has the highest percent ownership of Pigeon shares outstanding among gurus.
Hennessy Japan Fund (Trades, Portfolio) made one sell during the past four months: medical instrument company Terumo Corp. (TSE:4543). Based on a “25 P/E earnings line,” i.e., the fair price based on a P/E (w/o NRI) of 25, the Japanese medical company is significantly overvalued. Terumo is still overvalued even with a 30 P/E earnings line, suggesting that the company’s stock is a little too expensive.
Currently, Terumo’s stock price is near a 10-year high, a warning sign that the company’s stock may tumble in the short term. With contracting operating margins and high asset growth relative to revenue growth, the Japanese medical company may become inefficient and begin issuing long-term debt. As Terumo’s financials potentially weaken, Hennessy Japan Fund (Trades, Portfolio) pared its Terumo position by 8.43%, knocking off 0.66% of its portfolio. Additionally, T. Rowe Price Japan Fund (Trades, Portfolio) eliminated its position in the Japanese medical company.
See also: International Picks feature and more
GuruFocus users can view all international trades recently made by gurus using Gurus’ International Picks. Located under the “Gurus” tab, International Picks lists all buys and sells outside the U.S.
By default, International Picks lists the transactions for all countries followed by GuruFocus. Users can narrow their search to a single country by clicking on that country’s name in the gray box at the top of the page. The selected country’s name becomes white, and the list only shows buys and sells from that country. For each stock listed, the list provides the ticker, the company name, the country, the date when the transaction was filed, the action (buy, add, reduce or sold out), impact to portfolio, price range, current price, change from average, guru pick, comment and number of shares owned by the guru.
Additionally, users can view the Geographic Trends of gurus, which ranks the countries by number of guru buys. While guru buys is the default setting, the list can be sorted by country, net buys, guru buys and guru sells. The map of the world visualizes the guru buys per country using a blue color scale; the countries that have high numbers of guru buys get the darkest blue shades.
Other cool guru features include the Aggregated Portfolio, the Scoreboard and Consensus Picks of Gurus. Users can also view their gurus’ top 10 holdings and get more information about the Aggregated Portfolio with this article.
Disclaimer: I currently do not own any stocks discussed in this article.
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