The Parnassus Endeavor Fund (Trades, Portfolio), part of Jerome Dodson (Trades, Portfolio)’s Parnassus Investments, disclosed two new positions in its second-quarter portfolio, which was released this week.
With the goal of capital appreciation, the San Francisco-based fund is interested in discounted, out-of-favor large-cap companies with strong competitive advantages, quality management teams and positive environmental, social and governance commitments. Known for its stance on social and environmental responsibility, Dodson’s firm looks for companies with good work environments and avoids investing in companies that produce, transport or sell fossil fuels.
Based on these criteria, the Endeavor Fund, which is managed by Dodson and Billy Hwan, established holdings in Gap Inc. (GPS, Financial) and Alaska Air Group Inc. (ALK, Financial) during the quarter.
Gap
Parnassus invested in 8.7 million shares of Gap, allocating 4.45% of the equity portfolio to the stake. The stock traded for an average price of $22.46 per share during the quarter.
The San Francisco-based retailer, which owns the Gap, Old Navy, Banana Republic and Athleta clothing brands, has a $7.07 billion market cap; its shares were trading around $18.59 on Thursday with a price-earnings ratio of 6.76, a price-book ratio of 2 and a price-sales ratio of 0.44.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated Gap’s financial strength 6.5 out of 10, driven by comfortable interest coverage and good cash-debt and debt-to-equity ratios. The Altman Z-Score of 2.49, however, indicates the company is under minor fiscal pressure.
The company’s profitability and growth scored a 7 out of 10 rating. Although the operating margin is in decline, it still outperforms more than half of its competitors. Gap is also supported by strong returns, a moderate Piotroski F-Score of 6, which implies operations are stable, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in Gap, Dodge & Cox has the largest position with 4.66% of outstanding shares. Pioneer Investments (Trades, Portfolio), Jim Simons' (Trades, Portfolio) Renaissance Technologies, Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss and John Hussman (Trades, Portfolio) are also shareholders.
Alaska Air
The Endeavor Fund picked up 800,000 shares of Alaska Air, dedicating 1.45% of the equity portfolio to the holding. During the quarter, the stock traded for an average per-share price of $60.84.
The airline, which is headquartered in SeaTac, Washington, has a market cap of $7.87 billion; its shares were trading around $63.93 on Thursday with a price-earnings ratio of 18.07, a price-book ratio of 2.11 and a price-sales ratio of 0.95.
According to the Peter Lynch chart, the stock is slightly overvalued.
Supported by adequate interest coverage, Alaska Air’s financial strength was rated 5.5 out of 10 by GuruFocus. The weak Altman Z-Score of 1.73, however, warns the company could be at risk of going bankrupt.
The company’s profitability and growth fared a bit better, scoring a 7 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of industry peers. Alaska Air is also being weighed down by disappointing returns and a low Piotroski F-Score of 3, which suggests business operations are poor. The 2.5-star business predictability rank is on watch as a result of a slowdown in revenue per share growth over the last 12 months. GuruFocus says companies with this rank typically see their stocks gain an average of 7.3% per year.
With 4.89% of outstanding shares, PRIMECAP Management (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors include Sarah Ketterer (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Pioneer, Lee Ainslie (Trades, Portfolio), Jeff Auxier (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Additional trades
During the quarter, Parnassus also beefed up its positions in Regeneron Pharmaceuticals Inc. (REGN, Financial), Perrigo Co. PLC (PRGO, Financial), Biogen Inc. (BIIB, Financial), Alliance Data Systems Corp. (ADS, Financial) and Capital One Financial Corp. (COF, Financial).
The Endeavor Fund’s $3.52 billion equity portfolio, which is composed of 25 stocks, is heavily invested in the technology sector at 43.96%, followed by smaller holdings in health care and financial services.
According to GuruFocus data, the Endeavor Fund posted a -13.49% return in 2018, underperforming the S&P 500’s return of -4.38%.
Disclosure: No positions.
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