ValueAct Holdings, the investment firm founded by Jeff Ubben (Trades, Portfolio), disclosed three new positions in its fourth-quarter 2019 portfolio last week.
Known for its activist investments, the San Francisco-based firm concentrates on acquiring significant ownership stakes in a handful of companies it believes are fundamentally undervalued. The investment team seeks out-of-favor companies that are mispriced for a specific reason; ValueAct then works productively with management to maximize shareholder value. Ubben stepped down as chief investment officer in July 2017, handing the reins to his protégé, Mason Morfit. He remains at the firm as CEO.
Based on these criteria, ValueAct established positions in FedEx Corp. (FDX, Financial), Verra Mobility Corp. (VRRM, Financial) and Outfront Media Inc. (OUT, Financial) during the quarter.
FedEx
The firm invested in 590,000 shares of FedEx, allocating 0.90% of the equity portfolio to the holding. The stock traded for an average price of $154.38 per share during the quarter.
The Memphis, Tennessee-based courier company has a $41.42 billion market cap; its shares were trading around $158.62 on Friday with a price-earnings ratio of 755.33, a price-book ratio of 2.22 and a price-sales ratio of 0.6.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overvalued. The GuruFocus valuation rank of 6 out of 10, however, leans toward undervaluation as its price-book and price-sales ratios are near five-year lows.
GuruFocus rated FedEx’s financial strength 4 out of 10. Although the company has issued approximately $4.8 billion in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 2.05, however, indicates it is under some financial pressure.
The company’s profitability fared a bit better, scoring a 7 out of 10 rating on the back of an expanding operating margin. FedEx, however, is suffering from poor returns that underperform a majority of competitors. It also has a moderate Piotroski F-Score of 4, which implies operations are stable. Due to a slowdown in revenue per share growth over the last 12 months, the business predictability rank of one out of five stars is on watch. 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 many gurus invested in FedEx, Dodge & Cox has the largest stake with 9.95% of outstanding shares. Other top guru shareholders include PRIMECAP Management (Trades, Portfolio), Bill Gates (Trades, Portfolio)’ foundation trust, Mason Hawkins (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Hotchkis & Wiley, Pioneer Investments (Trades, Portfolio), Stanley Druckemiller, Charles Brandes (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Verra Mobility
ValueAct picked up 5.15 million shares of Verra Mobility, dedicating 0.73% of the equity portfolio to the stake. During the quarter, shares traded for an average price of $14.36 each.
The information technology services management company, which is headquartered in Mesa, Arizona, has a market cap of $2.68 billion; its shares were trading around $16.59 on Friday with a forward price-earnings ratio of 18.98, a price-book ratio of 8.03 and a price-sales ratio of 3.72.
According to the median price-sales chart, the stock is overvalued.
Verra Mobility’s financial strength and profitability were both rated 3 out of 10 by GuruFocus. The company is being weighed down by debt and extremely low interest coverage. The Altman Z-Score of 2.33 suggests it is under some financial pressure as its Sloan ratio indicates it has poor earnings quality.
While the company has a solid operating margin, its returns on equity and assets are negative and underperform a majority of industry peers. Verra also has a moderate Piotroski F-Score of 5.
With his purchase of 3.19% of its outstanding shares, Ubben’s firm became Verra Mobility’s largest guru shareholder. Simons’ firm, Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also have positions in the stock.
Outfront Media
The activist firm opened a 372,400-share holding in Outfront Media, giving it 0.10% space in the equity portfolio. The stock traded for an average per-share price of $26.11 during the quarter.
The New York-based real estate investment trust, which owns advertising space in the form of billboards and transit displays, has a $4.43 billion market cap; its shares were trading around $30.84 on Friday with a price-earnings ratio of 29.09, a price-book ratio of 4.05 and a price-sales ratio of 2.51.
Based on the Peter Lynch chart, the stock is overvalued. In addition, the GuruFocus valuation rank of 4 out of 10 also leans toward overvaluation since the share price and price ratios are near multiyear highs.
GuruFocus rated Outfront Media’s financial strength 3 out of 10 on the back of poor interest coverage and $253.3 million in new long-term debt. In addition, the Altman Z-Score of 0.85 warns the company is financial distress and could be at risk of going bankrupt.
The company’s profitability fared better, scoring a 6 out of 10 rating on the back of a strong return on equity and a moderate Piotroski F-Score of 6. Although the operating margin is expanding, it still underperforms a majority of competitors.
Simons’ firm has the largest stake in Outfront Media with 2.71% of outstanding shares. Other top guru shareholders are Tom Russo (Trades, Portfolio), Richard Snow (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Jones and Joel Greenblatt (Trades, Portfolio).
Additional trades and portfolio composition
During the quarter, ValueAct also added to its holdings of Trinity Industries Inc. (TRN, Financial), Strategic Education Inc. (STRA, Financial), Hawaiian Electric Industries Inc. (HE, Financial), LKQ Corp. (LKQ, Financial) and Lindblad Expeditions Holdings Inc. (LIND, Financial).
Nearly half of the firm’s $9.88 billion equity portfolio, which is composed of 22 stocks, is invested in the financial services sector.
Disclosure: No positions.
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