The Smead Value Fund (Trades, Portfolio) recently disclosed its portfolio updates for the first quarter of 2020. The reported quarter for the fund ended on Feb. 29, 2020, as per regulatory filings.
The fund operates under Smead Capital Management. Its contrarian investing strategy is based on large-cap stocks that meet the following criteria: serve an economic need, have a strong competitive advantage, have a long history of profitability and strong operating metrics, generate high levels of free chase flow, are undervalued, have a strong balance sheet, show insider ownership and have a history of friendly relations between management and shareholders. The fund is managed by lead portfolio manager Bill Smead, along with co-portfolio managers Tony Scherrer, CFA and Cole Smead, CFA
As of the quarter’s end, the Smead Value Fund (Trades, Portfolio) held shares in 27 stocks valued at $1.16 billion. Its top holdings were Target Corp. (TGT, Financial) at 7.14%, NVR Inc. (NVR, Financial) at 6.87% and Amgen Inc. (AMGN, Financial) at 6.58%. In terms of sector weighting, it is most heavily invested in the financial services, consumer cyclical and health care spaces.
Based on its investing criteria, the fund established new positions in D.R. Horton Inc. (DHI, Financial) and Chevron Corp. (CVX, Financial) during the quarter. It also made additions to several existing holdings, most notably Occidental Petroleum Corp. (OXY, Financial) and Macerich Co. (MAC, Financial).
D.R. Horton
The fund made a new investment of 443,578 shares in D.R. Horton, impacting the equity portfolio by 2.04%. Shares traded at an average price of $56.54 during the quarter.
Headquartered in Arlington, Texas, D.R. Horton is the largest homebuilder in the U.S. by volume. It builds new homes and sells both new and old homes through four brands: Express, Emerald, Freedom and D.R. Horton, which are all marketed toward different age and wealth demographics.
On April 23, shares of D.R. Horton traded around $39.18 for a market cap of $14.35 billion and a price-earnings ratio of 8.4. According to the Peter Lynch chart, the stock is trading below its intrinsic value.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.41 and current ratio of 10.08 suggest cash position strength, while the Altman Z-Score of 4.62 indicates that the company is safe from bankruptcy. With an operating margin of 12.1%, which is higher than the industry median of 8.27%, the company has consistently grown its revenue and net income since the 2008 recession.
Chevron
The fund also invested in 252,859 shares of Chevron., which had a 2.04% impact on the equity portfolio. During the quarter, share traded for an average price of $113.83.
Chevron is a member of the “Big Six” multinational oil companies that dominate the U.S. market share. Headquartered in San Ramon, California, the company explores for and refines oil and natural gas and produces a variety of chemicals, including ethylene, polyethylene, aromatics and styrenics. It has operations in more than 180 countries.
On April 23, Chevron’s shares traded around $87.01 apiece for a market cap of $162.78 billion and a price-earnings ratio of 57.5. The Peter Lynch chart indicates that this valuation is high compared to the company’s earnings from recent years.
Chevron has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.21 and current ratio of 1.07 are average for the industry, while the Altman Z-Score of 2.74 indicates that the company is in minor financial distress. The operating margin of 0.07% is lower than its historical average, indicating low profitability of operations despite a three-year revenue growth rate of 7.8%.
Occidental Petroleum
The fund purchased an additional 551,927 shares of Occidental Petroleum, increasing the stake by 40.39%. The trade had a 1.56% impact on the equity portfolio. Shares traded for an average price of $40.98 during the quarter.
Occidental is an oil and gas exploration and production company with facilities in the United States, the Middle East, Latin America and Africa. Among major fossil fuel producers, Occidental ranks number one in terms of CO2 EOR (carbon sequestration and reuse) projects.
On April 23, shares of Occidental Petroleum traded around $13.87 for a market cap of $12.72 billion. GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10.
With a cash-debt ratio of 0.08 and a return on invested capital of -242.28%, Occidental’s cash burn puts it in a weaker financial position than 73% of competitors in the oil and gas industry. The Altman Z-Score of 0.61 indicates that the company could be in danger of bankruptcy.
Macerich
The fund also added 490,241 shares, or 34.5%, to its position in Macerich. The trade impacted the equity portfolio by 0.86%. During the quarter, shares traded for an average of $25.06 apiece.
Macerich is a U.S. premier REIT that deals in affluent, densely populated areas that often have strong international appeal. It markets itself as being focused on social responsibility and sustainability, with high numbers of employee volunteer hours and four LEED Gold properties (properties that have achieved 60 to 79 sustainability points according to the LEED green building certification requirements).
On April 23, Macerich’s shares traded around $5.93 apiece for a market cap of $837.87 million and a price-earnings ratio of 8.71. According to the Peter Lynch chart, the stock is trading below its intrinsic value.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.02, current ratio of 0.84 and Altman Z-Score of -0.04 suggest that the company is likely in danger of bankruptcy if it does not receive aid or raise more capital. The three-year revenue growth rate is -2.6%, while the operating margin of 22.23% is lower than 79% of competitors in the REIT industry.
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. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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