Tweedy Browne (Trades, Portfolio) Co. LLC recently disclosed its portfolio updates for the fourth quarter of 2019.
The firm was established in 1920 by Forest Birchard Tweedy as a dealer in closely held and inactively traded securities. Over its 100-year history, it has evolved into an investing company that seeks long-term capital growth in companies around the globe. Its Benjamin Graham-style value investing approach focuses on undervalued securities that have strong growth potential, above-average dividend yields and an established dividend history.
Based on the above criteria, the firm made more sells than buys in the recent quarter. It sold out of its positions in Unilever NV (XAMS:UNA, Financial), Devon Energy Corp. (DVN, Financial) and Avnet Inc. (AVT, Financial), but did not establish any new positions. Its biggest buys were additions to its existing holdings in Baidu Inc. (BIDU) and Coca-Cola Femsa SAB de CV (KOF).
Unilever
Tweedy, Browne sold out of its 3,574,701-share stake in Unilever, impacting the equity portfolio by -7.60%. Shares of the company traded at an average price of 53.26 euros ($57.96) during the quarter.
Unilever is a British-Dutch consumer goods manufacturer that sells its products globally. Its brands include Lipton, Ben & Jerry’s, Surf, Axe, Dove, Unilever and other world-famous names.
On Feb. 26, Unilever traded around 51.52 euros per share for a market cap of 135.12 billion euros and a price-earnings ratio of 24.07. GuruFocus has assigned the company a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10.
The firm originally established the position in the third quarter of 2019, making it the third-largest position in the equity portfolio. Over the brief holding period, the investment returned a total estimated loss of 1.46%, according to GuruFocus calculations.
Tweedy, Browne still retains some exposure to the company through Unilever’s New York Stock Exchange listings. Unilever NV (UN, Financial) has a 1.13% share of the equity portfolio, while Unilever PLC (UL, Financial) has a 0.26% weight in the equity portfolio. In other words, the firm only sold out of the more significant London Stock Exchange investment in the company.
The quick axe chop to investments in a company which the firm had significantly upped its stake in during previous quarter may come as a surprise to investors. However, Unilever’s reorganization efforts, which began in 2019 when Alan Jope took over as CEO, may have something to do with the back-and-forth here.
When Jope took the reins of the company after the first half of 2019, he warned that Unilever was planning to sell off brands that did not contribute positively to society or the environment, as the value of these brands is likely to decrease in the long term due to consumer tastes shifting toward sustainability.
In response to concerns that this might hurt the company, Jope pointed out that the company’s most sustainable brands, including Dove, Seventh Generation and Sunsilk, have had more success than unsustainable brands in recent years. In 2018, the company’s 28 “Sustainable Living Brands” grew 69% faster than the rest of the names under its umbrella. “In the future, every Unilever brand will be a brand with a purpose,” the CEO said in a statement.
Unilever has a three-year revenue growth rate of 2.3% and a three-year earnings before interest, taxes, depreciation and amortization growth rate of 8.3% - not negative, but certainly not high. The slow growth may cause the company to be willing to take losses in the short term in order to transform itself into a sustainable-brand behemoth in the future.
Devon Energy
The firm also sold its remaining 1,179,525 shares of Devon Energy, impacting the equity portfolio by -1.00%. Shares traded at an average price of $22.57 during the quarter.
Devon Energy is an oil and natural gas exploration company headquartered in Oklahoma City. It focuses mainly on U.S. onshore operations and currently seeks to optimize profits by cutting costs and selling non-core assets.
On Feb. 26, Devon Energy shares traded around $17.02 for a market cap of $6.72 billion. GuruFocus has assigned the company a financial strength rating of 4 out of 10 and a profitability rating of 5 out of 10.
Factors such as a favorable debt-to-Ebitda ratio of 1.28 and an operating margin of 17.9% are balanced with drawbacks such as a low Altman Z-score of 2.22 and a three-year annual revenue decline of 12.6%.
The energy sector as a whole has not done well over the past 12 months, with energy stocks underperforming all other components of the S&P 500. Downward price pressures from oil and natural gas oversupply and international political and trade tensions have cut into the profits of energy companies. Devon Energy has also seen its revenue decline in recent years, even as net income continues to recover from a $12.89 billion loss in 2016.
Avnet
Tweedy, Browne exited its 580,127-share position in Avnet, which had a -0.91% impact on the equity portfolio. During the quarter, shares of the company traded at an average price of $41.17 apiece.
Avnet is an electronic hardware distributor and services provider based in Phoenix. As a “technology solutions provider,” it helps its customers design, manufacture and deliver their products to the global market.
On Feb. 26, shares of Avnet traded around $32.96 for a market cap of $3.30 billion and a price-earnings ratio of 34.33. According to the Peter Lynch chart, the stock is trading above its intrinsic value.
Avnet has a GuruFocus financial strength rating of 6 out of 10 and a profitability rating of 7 out of 10. Although its cash-debt ratio of 0.25 is lower than 83.71% of competitors, the debt-to-revenue ratio of 0.11 is a positive sign, as is the Altman Z-score of 3.67. The company has seen its revenue grow in recent years, though net income has decreased.
As a company that provides services to other companies, Avnet’s profits often depend on contracts. Thus, the loss of large contracts could lead to revenue taking a hit. For example, Texas Instruments (TXN) plans to end its distribution relationship with Avnet in December of 2020, resulting in the loss of a contract worth $35 million and an even bigger blow to investor sentiment.
Portfolio overview
As of the end of the fourth quarter, Tweedy, Browne’s $2.77 billion equity portfolio consisted of holdings in 43 stocks.
The top holdings were Berkshire Hathaway Inc. (BRK.A) with 12.77% of the equity portfolio, Johnson & Johnson (JNJ) with 10.38%, Cisco Systems Inc. (CSCO) with 9.65%, Baidu Inc. with 7.41% and Bank of New York Mellon Corp. (BK) with 7.19%. In terms of sector weighting, the firm was most heavily invested in financial services and communication services.
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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