Howard Marks (Trades, Portfolio)' Oaktree Capital Management recently released its fourth-quarter 2019 portfolio updates.
Oaktree Capital Management is a global investing firm that specializes in alterative strategies and credit strategies. Originally founded in 1995, the Los Angeles-based firm now has over 39 portfolio managers and 950 employees in offices around the world. Marks is one of the group’s co-founders and currently serves as co-chairman (along with Bruce Karsh) and chief financial officer. The firm’s investment philosophy has six tenets: risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing.
Using the above criteria, the firm established new common stock positions in Bank Bradesco SA (BBD, Financial) and Alibaba Group Holding Ltd. (BABA, Financial) and preferred stock positions in Broadcom Inc. (AVGOP.PFD, Financial) (AVGO, Financial) and Fortive Corp. (FTVpA.PFD) (FTV, Financial) during the quarter.
Bank Bradesco
After selling out of a previous holding in Bank Bradesco in the fourth quarter of 2018, Marks’ firm established a new stake of 5,767,107 shares of common stock in the company, impacting the equity portfolio by 1.23%. Shares traded at an average price of $8.34 during the quarter.
Bank Bradesco is a Brazilian banking and financial services company. It has more than 5,300 branches and a significant online presence, making it one of the largest banks in Brazil. Its services include consumer banking, investment banking, private equity, private banking, asset management, insurance and retail banking.
On Feb. 17, shares of the company traded around $7.55 for a market cap of $59.12 billion and a price-earnings ratio of 15.99. According to the Peter Lynch chart, shares are trading near their fair value.
Bank Bradesco has a cash-debt ratio of 0.53, which is below average for the banking industry. Revenue has declined in recent years, though net income has been relatively stable.
The bank has the potential to benefit from the growing economy in Brazil. Amid positive economic signs, Brazil’s central bank recently cut the interest rate to 4.5%, a record low and the latest in a series of reductions from the 2016 rate of 14.25%.
Alibaba Group Holding
Oaktree sold out of Alibaba in the second quarter of 2019, but the firm has established a new common stock holding of 161,982 shares in the fourth quarter, impacting the equity portfolio by 0.82%. During the quarter, shares traded at an average price of $188.59.
Alibaba is a Chinese e-commerce, retail, internet and technology conglomerate that sells individual and bulk products to customers around the world. It also hosts third-party sellers and provides services such as logistics and production monitoring.
On Feb. 17, Alibaba shares traded around $219.63 for a market cap of $589.21 billion and a price-earnings ratio of 26.41. According to the Peter Lynch chart, the stock is trading near its intrinsic value.
GuruFocus has assigned Alibaba a financial strength score of 6 out of 10 and a profitability score of 9 out of 10. The cash-debt ratio of 1.65 and interest coverage of 15.2% are beating 60.19% of retail competitors. As per the chart below, revenue has grown exponentially over the years, though net income has been a bit slower to follow.
Alibaba has a strong market position as the most dominant player in the Chinese e-commerce space, and its diversification across individual consumer and corporate markets has the potential to give it more room to grow.
Broadcom Inc.
The firm invested in 5,000 shares of Broadcom preferred stock, impacting the equity portfolio by 0.14%. The preferred stock series traded at an average price of $1,124.36 during the quarter.
Broadcom is a designer, developer and manufacturer of various semiconductor and infrastructure software products. The San Jose, California-based company mainly sells to the data center, networking, storage, wireless, broadband and industrial markets.
On Feb. 17, the 8% series A mandatory convertible preferred stock sold for $1,180 per share. The five-year yield-on-cost is 17.72%.
The company has a financial strength score of 4 out of 10 and a profitability score of 10 out of 10 from GuruFocus. The cash-debt ratio of 0.15 and interest coverage of 2.89% are low, but the Altman Z-score of 2.35 is still in the grey zone. The return on capital of 101.11% and three-year revenue growth rate of 16% are outperforming 75.72% of competitors.
Fortive Corp.
The firm also invested in a new preferred stock position of 2,500 shares in Fortive after selling out of the same in the second quarter of 2019. During the quarter, the preferred stock series traded at an average price of $931.18.
Fortive is a global-scale industrial conglomerate headquartered in Everett, Washington. The businesses operating under its umbrella are involved in many aspects of technology, including tools and materials, sensors and controls, electronic tools, biomedical equipment, sterilization products, food sensors and cloud-based tracking.
On Feb. 17, the 5% series A mandatory convertible preferred stock sold for $983.90 per share. The five-year yield-on-cost is 5.08%.
The company has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.18 and is at the low end of the spectrum, but the 6.12% interest rate and the Altman-Z score of 2.52 are average. The return on capital of 85.21% and operating margin of 13.72% are beating 86.95% of competitors.
Portfolio overview
As of the quarter’s end, the equity portfolio for Oaktree Capital Management consisted of 74 stocks, valued at a total of $4.19 billion. The turnover rate was 4%.
The firm’s top holdings were Vistra Energy Corp. (VST) with 14.95% of the equity portfolio, TORM PLC (TRMD) with 12.88%, Star Bulk Carriers Corp. (SBKL) with 10.72%, Ally Financial Inc. (ALLY) with 7.97% and Caesars Entertainment Corp. (CZR) with 4.94%.
By sector weighting, the firm was most invested in energy, financial services and utilities.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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