Guru investor Jerome Dodson (Trades, Portfolio)’s Parnassus Fund established three new positions in the second quarter, according to filings released on Thursday.
Newcomers to the portfolio included Post-It Notes maker 3M Co. (MMM, Financial), telecom operator Zayo Group Holdings (ZAYO, Financial) and the nation’s third-largest wireless carrier, T-Mobile US Inc. (TMUS, Financial).
Parnassus lodged a 15% quarter-over-quarter turnover of its assets valued at $975 million. A total of 33 stocks sat in the portfolio as of July 12. In the second quarter, a few tweaks were made as well in stakes of high-profile companies like CVS Health Corp. (CVS, Financial), which were pumped by as much as 95%. Other expansions included Starbucks (SBUX, Financial), Allergan (AGN, Financial), Cognizant Technology Solutions (CTSH, Financial) and Thomson Reuters (TRI, Financial).
Dodson founded Parnassus Investments in 1984. He is the lead manager of the Parnassus Fund and the Parnassus Asia Fund, and is the sole portfolio manager of the Parnassus Endeavor Fund. He’s known for picking stocks of companies with wide moats, which are relevant and depend on quality management teams. He also prefers stocks that are trading at a significant discount to their intrinsic value.
More than 39% of the portfolio is made up of stocks in the financial services and health care sectors. Technology and industrials make up the bulk of the remainder, while consumer cyclical, basic materials and real estate play lesser roles.
Dodson, as most value investors, adopts the contrarian approach to investments in companies that have fallen out of favor on Wall Street.
He is also known for his pioneer work in socially responsible investing, which has gained traction with the investment community in recent years.
Last year, the fund returned 16% to the S&P 500s 21.71%. In the year prior, it beat the index, returning 13.45% to its 11.99%.
3M Co.
Dodson bought more than 151,000 shares of the Minnesota-based diversified technology company. He paid an average price of $204 a share in the second quarter for an estimated loss, as of Friday, of 1%. Shares sit in 3% of his portfolio.
3M has its hands in a number of business segments, including industrial, safety, graphics, health care, electronics and energy products. It produces Scotch tape, Post-It Notes and heavy-duty adhesives, reflective sheeting, sanding wheels and filters.
In Friday trading, the stock climbed almost 1% by early afternoon. It stood at $201.25. The high-quality company is rated a four-star on GuruFocus’ business predictability ranking, which highlights those performers that have gained as much as 9.8% a year in the value of their stock.
The company with a $119 billion market cap also pays a dividend yield of 2.53%, which GuruFocus believes is not exactly sustainable over time. The dividend payout ratio is 0.72. The payout is the highest in an industry of more than 1,200 competitors.
Year to date, the stock had fallen 15%, which suggests an entry point. The GuruFocus median price-sales chart shows the stock is trading above its historical value.
The stock is trading at 29.86 times price-earnings and 19.31 times forward price-earnings. In both cases, the ratio is at least 64% lower than peers in the Diversified Industrials Industry.
GuruFocus suggested that investors take caution as well because the company has issued more than $7.7 billion in debt over the last three years. At this time, however, the debt is acceptable.
The company reported average earnings before interest, taxes, depreciation and amortization of 5.4% a year over the last decade. It returned -1.4% over the last 12 months in EBITDA. In revenues and profits, it is a steady performer as well, though 2018 has been a bit of a challenge. Analysts targeted EBITDA of $9 billion on revenue of $35.7 billion in 2020.
GuruFocus gives the company a ranking of 6 out of 10 in financial strength and 7 of 10 in profitability and growth.
Other guru shareholders included Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Donald Yacktman (Trades, Portfolio).
Zayo Group Holdings
The guru purchased 600,000 shares of Colorado-based Zayo Group in the second quarter for an average price of $35.63 a share. The investment has returned an estimated 9% since he established the new position. Zayo sits in 2.24% of the guru's portfolio.
The global provider of fiber-based communications operates 6,000 cellular towers and over 1,000 data centers. The company went public almost four years ago. As revenues climbed, it posted its first profits this year.
On Friday, the stock stood at just under $40 a share, down 1.32% in afternoon trading. Year to date, it is up 7%. Over the last three years, the stock has surged 57%.
The median price-sales chart shows the stock may be valued near the market, but the historical data is not complete. Currently, it is suggesting the stock price is near historical value.
It is trading at 121.43 times earnings, which is lower than 93% of companies in the Global Communication Equipment Industry. It is trading at 71.94 times forward price-earnings, which is 91% lower than about 66 companies in the industry.
At a market cap of nearly $10 billion, Zayo Group’s challenge is its debt. GuruFocus’ screener indicated that Zayo Group issued more than $2 billion in debt over the last three years.
GuruFocus ranks the company 4 out of 10 in financial strength and 6 out of 10 in profitability and growth.
Guru shareholders of the company included Dodge & Cox,Ă‚ Greenblatt, Paul Tudor Jones (Trades, Portfolio), Louis Moore Bacon, Jana Partners (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and George Soros (Trades, Portfolio).
T-Mobile US
Dodson purchased a total of 352,000 shares for an average price of $59.26 a share. The shares sit in about 2.16% of his portfolio. He's made an estimated 3% return on the investment so far. T-Mobile is headquartered in Washington state.Ă‚
Investors have been closely watching the development of merger discussions between T-Mobile and Sprint (S, Financial). The two companies are waiting for regulators to approve a consolidation. If the deal is approved, the U.S. wireless landscape could see a seismic shift.
T-Mobile US was created with the combination of MetroPCS with Deutsche Telekom’s T-Mobile USA unit. The company services 55 million retail connections, including 35 million postpaid and 20 million prepaid connections.
It trails in size behind AT&T (T, Financial) and Verizon (VZ, Financial) and is larger than Sprint.
Stock in the nation’s third-largest wireless carrier saw a slight decline of 0.18% on Friday afternoon. Shares stood at $61.47 in trading. Year to date, the stock is down 4%. Over the last three years, it has gained 55%.
The Peter Lynch chart suggested the stock is slightly undervalued.
But the median price-sales chart for GuruFocus indicated it is trading above historical values.
T-Mobile is trading at 11.80 times price-earnings and 19.69 times forward price-earnings. The price-earnings ratio indicated a ranking that is higher than more than 70% of its peers in the Global Telecom Services Industry. GuruFocus indicated that its price-sales ratio is close to a 10-year low, and that operating margins have been expanding for the company. One red flag: Declining revenue per share in a highly competitive market. The company’s revenue took off after 2012, while profits have been growing. It has very healthy business operations based on a Piotroski F-Score of 7.
The company is projected to draw more than $46.8 billion in revenue in 2020. In EBITDA, it is expected to pull $13.6 billion in 2020.
It does not pay a dividend.
Guru shareholders included David Tepper (Trades, Portfolio), Ray Dalio (Trades, Portfolio),Ă‚ Jones, Cohen, Caxton Associates (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
