Value investor Joel Greenblatt (Trades, Portfolio) is shaking things up in a portfolio valued at $7 billion.
In the first quarter, Gotham Asset Management posted a 39% quarter-over-quarter turnover. Out of a total of 929 stocks, a total of 240 were new buys.
High turnover is typical for the hedge fund manager, who assesses stocks based on what he calls the “Magic Formula.” He looks for companies that have solid returns on equity and utilize their capital in an efficient manner. (Greenblatt typically sells out after a year.)
But the recent turnover in Gotham's holdings represents its most dramatic in two years. In the first quarter of 2016, the guru reported an estimated quarter-over-quarter turnover of 46%. He initiated a total of 311 new positions.
Greenblatt’s top new positions in the first quarter were International Business Machines Corp. (IBM, Financial), a company he has held for several consecutive years. (The guru, like many others, is likely to bend a rule or two every now and then.)
VF Corp. (VFC, Financial), the North Carolina-based brand behind Vans slip-on shoes and Wrangler jeans, was the guru’s second top buy.
His third top buy was global chocolate manufacturer The Hershey Co. (HSY, Financial). The Pennsylvania-based company dominates 45% of U.S. chocolate sales.
Fidelity National Information Services Inc. (FIS, Financial) was the guru’s fourth-largest new position. The Florida-based company provides core and payment processing services to banks. It serves more than 20,000 institutions in 130 countries.
Gotham's portfolio is largely made up of three sectors, technology, consumer cyclical and industrials, which represent more than 60% of its holdings. Other positions include stocks in health care, consumer defensive, basic materials, energy and financial services.
Like other long-term minded investors, Gotham's value-oriented performance has struggled over a year of break-neck growth momentum in the markets. (In its first decade of performance, Gotham Asset Management posted returns of 50% through 1995.)
The Gotham Absolute Return Fund has generally maintained a long exposure of 120%, a short exposure of 60% and a "net long" exposure of 60%, according to Greenblatt's most recent shareholder letter.
In 2017, the Rhode Island-based absolute return fund reported a rate of return of 10.01%. The S&P 500 reported a rate of return of 21.71%.
In 2016, Gotham posted a return of 7.96%. The S&P 500 reported a rate of return of 11.96% that year.
IBM
A total of 301,775Ă‚ IBM shares now sit in 0.65% of the portfolio space. He bought the shares at an average price of $158.26 a share. So far, the investment has produced an estimated loss of 9%.
IBM's stock has dropped dramatically in value. More than five years ago, the price per share was $182.87. IBM is trading at $144.76 today. Afternoon trading showed it was up 0.09%. Over the last three years, shares have fallen in value by 14%.
Greenblatt sold off his IBM shares in the final months of the year after holding them for several years. Last year, investors watched closely as Warren Buffett (Trades, Portfolio), the world's most famous investor, went on an IBM sales spree. He sold 16.6 million in the first quarter of 2017, then another 10 million in the second quarter and 17 million in the third quarter and, finally, 34 million in the fourth quarter. (Buffett is out of IBM.)
IBM stock is trading at 23.7 times earnings. However, it is trading 10.38 times forward earnings. The company has a price-book of 7.29, which is lower than the majority of its peers. It has a price-sales ratio of 1.69 times, which is higher than more than 1,900 companies in the Global Information Technology Services Sector.
It produces a dividend yield of 4.18%, which places it among the 10% of more than 1,300 sector peers that provide similar yields to investors. The median is 1.41%.
Analysts don’t foresee huge improvements in revenue for the company in upcoming years. In fact, the forecast is for revenues to remain relatively flat. The company has seen an average annualized earnings growth of 2.4% over the last 10 years and -6.70% in the last five years. It has reported 6.1% over the last 12 months. Net income stood at $5.8 billion, compared to $12 billion in the prior year.
Its return on equity dropped to 32% in December 2017 from 73% the year prior. The company enjoyed a ratio of more than 73% from 2011 to 2015, when it exceeded 100%. Its return on capital is 106.46%.
It has a market cap of $132.6 billion. GuruFocus ranks it 5 out of 10 in financial strength and 5 of 10 in profitability and growth.
VF Corp.
The guru bought 388,800 shares for an average price of $76.79 a share. The shares sit in about 0.4% of the portfolio. Shares were kissing $80 on Thursday afternoon, slightly up. The stock is up 11% over three years of trading.
VF Corp. is trading at 48.53 times earnings and 23.87 times forward earnings. The price-book ratio is 8.57 times, which is in the bottom percentile of its peers in the same sector. Its price-sales ratio is 2.59 times. That is lower than the majority of peers.
It has an average annualized earnings growth rate of 8.5% over the last 10 years, and 1.1% over the last five years. In 12 months, the number has climbed to 17.6%.
The company’s revenues have been steadily increasing over the last 15 years. Revenues stood at $11.8 billion in the final months of the year compared to $11 billion in the prior year. Revenues stood at $5.2 billion 15 years ago. Net income was reported as $615 million in December 2017, compared to $1 billion in the prior year. Long-term debt has reached over $2 billion, compared to $1.4 billion five years ago. It has a free cash flow of $1.2 billion.
Its return on equity of 14.2% has fallen compared to recent years. It reached a high of 21% in 2011.
It is ranked 5 out of 10 in financial strength and in profitability and growth. It has a market cap of $31 billion.
The Hershey Co.
The first-quarter purchase of 246,187 shares was for an average price of $103.31 a share. He has produced an estimated loss of 10% on his investment, so far.
On Wednesday after market close, Hershey stood at $93.64. Trading that day was up 1.07%. Over five years, shares have fallen by 2%. Year to date, the stock has lost 16% of its value.
The stock is trading at 19 times earnings and 17 times forward earnings. It has a price-book ratio of 20.22, lower than 98% of peers in the Global Confectionary Industry. Its price-sales ratio is 2.61, lower than 79% of peers in the same sector.
Hershey's return on equity is 114%, while its return on capital is 57.16%
Revenues stand at more than $7.5 billion compared to $7.4 billion a year ago. Its net income is over $783 million, compared to $720 million a year ago. The company's long-term debt is $2 billion. It has a free cash flow of $992 million.
The company has a market cap of $19 billion and is rated 5 out of 10 in financial strength and 8 of 10 in profitability and growth.
Fidelity National Information Services
Greenblatt bought 216,563 shares for an estimated 7% gain on the investment, so far. The buy made a 0.29% impact on the portfolio. This is another company Greenblatt has held for a number of years. He sold out in the last quarter of 2017 for an average price of $93 a share. He then purchased new shares in the first quarter at $98 a share.
The company’s stock stood at $104.85 after market close on Wednesday. It gained a slight 0.13%. Over three years, the stock has gained 62%. Year to date, it is up 7%.
The stock trades for 25.82 times its earnings and 20 times its forward earnings. It has a price-book ratio that is 3.20 times and a price-sales ratio that is 3.94 times. Both ratios are lower than the majority of its industry peers.
In revenue, the company generated $9.1 billion in December 2017, compared to $9.2 billion in the prior year. In 2015, revenue was at $6.6 billion. In net income, the company generated $1.3 billion, compared to $568 million in the prior year.
Return on equity has climbed to 13.34% and its return on capital is 207.57%.
The company has a financial strength rating of 5 out of 10 and a profitability and growth rating of 8 of 10. GuruFocus gave it two severe warnings for a five-year consecutive drop in its operating margins. Operating margins were reported at 16% in December, compared to 19.82% in 2014.
Also, its asset growth is faster than its revenue growth, which could signal that it is becoming less efficient. It has a market cap of $34.7 billion.
