Jerome Dodson (Trades, Portfolio) disclosed in his second-quarter shareholder letter that the Parnassus Fund trailed the Standard & Poor’s 500 benchmark by approximately 2.4% for the quarter, primarily due to unfavorable sector allocation and poor results from Starbucks Corp. (SBUX, Financial). As of June, the guru’s high-conviction trades include Starbucks and three other companies: Hologic Inc. (HOLX, Financial), Mondelez International Inc. (MDLZ, Financial) and Thompson Reuters Corp. (TRI, Financial).
Guru’s portfolio hurt by lack of exposure to high-performing energy sector
Dodson, founder and chairman of Parnassus Investments, manages the Parnassus Fund with two other managers: Ian Sexsmith and Robert Klaber. The fund’s contrarian approach seeks to invest in out-of-favor companies with wide moats, long-term relevancy and quality management teams. Additionally, the fund invests in companies trading at a significant discount to intrinsic value.
Dodson said his fund gained 1.03% for the quarter, lagging the S&P 500’s return of 3.43%, primarily due to unfavorable sector allocation: the fund is overweight the financial services and industrials sectors, “the two worst-performing sectors” for the quarter. Additionally, the fund missed the high-performing energy sector as the managers avoid investing in companies engaging in the exploration and production of fossil fuels. Dodson said while oil prices might increase periodically due to geopolitical factors, the fund managers still expect oil and gas companies to underperform over the long term “as renewable power sources and electric vehicles increase in relevance.”
GuruFocus lists financial services, health care, technology and industrials as Dodson’s top four sectors in terms of portfolio weight, as Figure 1 illustrates.
Figure 1
Starbucks
Having added 64,000 shares of Starbucks during the first quarter, Dodson invested in 132,313 additional shares for an average price of $56.76 per share.
Dodson said Starbucks knocked 0.39% off the portfolio’s return as the company’s stock price tumbled from $57.89 to $48.85 throughout the quarter due to lower-than-expected sales and weaker guidance for the year. The Seattle-based coffee chain said on July 26 that it expects fourth-quarter global comparable store sales growth near the lower end of its targeted range of 3% to 5%. Further, full-year global comp sales growth is expected to underperform the targeted range. Dodson noted several headwinds to Starbucks’ performance, including growing competition in the U.S. and delivery interruptions in China.
Despite the setback, Dodson said he remains optimistic that Starbucks’ management can reaccelerate growth. GuruFocus’ five positive investing signs for Starbucks, which include expanding operating margins and consistent revenue growth, suggests strong growth potential. Starbucks’ margins and returns outperform over 95% of global competitors, which include McDonald’s Corp. (MCD, Financial), Yum Brands Inc. (YUM, Financial) and Chipotle Mexican Grill Inc. (CMG, Financial).
Hologic
Dodson added 65,000 shares of Hologic for an average price of $38.47 per share.
Hologic develops, manufactures and supplies diagnostics products, medical imaging systems and surgical programs for women. GuruFocus ranks Hologic’s profitability 7 out of 10 and lists one positive investing sign: expanding operating margins.
Mondelez
Dodson added 65,000 shares of Mondelez for an average price of $40.20 per share.
Deerfield, Illinois-based Mondelez manufactures and markets well-known snack brands like Oreos and Chips Ahoy. The company’s profitability ranks 6 out of 10: even though the company’s revenue has declined approximately 5.5% per year over the past three years, a rate that underperforms 77% of global competitors, Mondelez still has expanding operating margins and a strong Piotroski F-score of 8.
Other gurus with top positions in Mondelez include Bill Ackman (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Steven Romick (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Sarah Ketterer (Trades, Portfolio). Berkshire Hathaway Inc. (BRK.A)(BRK.B) CEO Warren Buffett (Trades, Portfolio) has a modest holding of 578,000 shares.
Thompson Reuters
Dodson invested in 294,769 shares of Thompson Reuters for an average price of $39.61 per share.
Thompson Reuters allows market participants to connect, access contest and trade in a secure environment. Although the company has a strong Piotroski F-score of 8, GuruFocus lists several warning signs for Thompson Reuters, including a modest Altman Z-score of 2.69, decelerating revenue growth and declining operating margins.
Summary of guru’s top holdings
Dodson’s top five holdings in terms of portfolio weight are Alliance Data Systems Inc. (ADS, Financial), Thompson Reuters, Motorola Solutions Inc. (MSI, Financial), Gilead Sciences Inc. (GILD, Financial) and CVS Health Corp. (CVS, Financial). Alliance Data and Motorola offset the guru’s loss in Starbucks: during the quarter, they contributed 0.49% and 0.54% to the portfolio return.
Disclosure: No positions.
