Steven Romick (Trades, Portfolio), manager of the FPA Crescent Fund, seeks long-term equity returns without permanent loss of capital. As discussed in the fund’s prospectus, the fund looks for companies trading at substantial discounts to their fair value. Such companies usually have low price-earnings ratios and potential for high returns on invested capital. During the third quarter, Romick invested in Ally Financial Inc. (ALLY, Financial) and Legg Mason Inc. (LM, Financial). Additionally, the guru added to his position in Baidu Inc. (BIDU, Financial) and Alphabet Inc. (GOOGL, Financial).
Guru makes two buys in financial services sector
Romick purchased 9,942,850 shares of Ally Financial at an average price of $18.58 per share. The guru increased his portfolio by 2.07% with this transaction.
The financial services company has a modest financial outlook: its financial strength rank and profitability rank are both 5 out of 10. Although the company’s operating margin and net margin are near a 10-year high, Ally Financial’s net margin still underperforms 54% of global specialty finance companies. Additionally, its three-year revenue growth is -2.4%, lower than 75% of companies in its industry.
Despite poor debt ratios, Ally Financial is undervalued based on its tangible book value and median price-to-sales value. During the past three years, the company’s price-to-tangible-book value steadily decreased.
Romick also purchased 3,669,319 shares of Legg Mason at an average price of $33.31 per share. The guru increased his portfolio 1.32% with this transaction.
The asset management company has a financial strength rank of 4, suggesting a poor financial outlook. With an Altman Z-score of just 1.16, Legg Mason faces potential bankruptcy risk. Additionally, its operating margin and return on equity are negative, underperforming 79% and 71% of global asset management companies respectively.
Despite poor margins and returns, Legg Mason is undervalued based on its projected free-cash-flow and median P/S value.
Guru adds to positions in online media companies
After investing in Baidu in the previous quarter, Romick increased his position in the Chinese media company by 146.11%. The stock averaged $173.03 in the third quarter, and Romick increased his portfolio by 0.83% with the latest transaction.
Despite contracting profit margins, Baidu still has a profitability rank of 8 and a four-star predictability rank. The Chinese media company has a financial strength rank of 7, and its Altman Z-score is a strong 5.76. Additionally, Baidu’s net margin and ROE outperform 97% and 94% of global internet content & information companies respectively. Baidu made three value screeners as of Oct.5, as discussed in a previous article.
The guru increased his position in Google by 0.27%. The company traded at an average price of $782.19.
Google’s financial strength rank and profitability rank are both 9, implying a strong business outlook. The company has strong F, Z and M scores, and its operating margin outperforms 86% of global internet content & information companies.
See also
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Disclosure: The author has no position in the stocks mentioned in this article.
