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Margaret Moran
Margaret Moran
Articles (235) 

Top New Portfolio Additions of Howard Marks’ Oaktree

The firm’s 1st-quarter investments include Baidu, Liberty Global

Oaktree Capital Management recently disclosed its portfolio updates for the first quarter of 2020, which ended on March 31.

Founded by Howard Marks (Trades, Portfolio) and several fellow investors in 1995, Oaktree Capital Management is a global investing firm that specializes in alternative and credit strategies. The Los Angeles-based firm now has over 39 portfolio managers and 950 employees in offices around the globe. Marks serves as co-chairman (along with Bruce Karsh) and chief financial officer. The firm’s core investment philosophy has six tenets: risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing.

Based on the firm’s investing criteria, its top new common stock buys for the quarter were for Taylor Morrison Home Corp. (NYSE:TMHC), Baidu Inc. (NASDAQ:BIDU), Liberty Global PLC (NASDAQ:LBTYK) and Petroleo Brasileiro SA Petrobras (NYSE:PBR).

Taylor Morrison Home

The firm’s biggest new buy of the quarter was for 4,825,000 shares of Taylor Morrison Home. The trade had a 1.83% impact on the equity portfolio. During the quarter, shares traded for an average price of $21.65.

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Taylor Morrison is a major U.S. homebuilder headquartered in Scottsdale, Arizona. Formed from the merger of Taylor Woodrow and Morrison Homes in 2007, the company has been rated “America's most trusted home builder” for the past five years by Lifestory Research’s consumer trust study.

On May 15, shares of Taylor Morrison traded around $14.73 for a market cap of $1.91 billion and a price-earnings ratio of 8.99. The Peter Lynch chart indicates that the stock is undervalued.

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GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.13 is lower than 72.65% of competitors, and the Altman Z-Score of 1.98 indicates that the company could face some risk of bankruptcy. The operating margin of 6.3% is below the industry median of 8.14%. The return on invested capital has dropped below the weighted average cost of capital, indicating difficulties with profitability.

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Baidu

The firm established a new position of 620,802 shares in Baidu after selling out of its previous holding in the company during the first quarter of 2017. The trade impacted the equity portfolio by 1.16%. Shares traded for an average price of $122.37 during the quarter.

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Baidu is a Chinese internet and technology giant that specializes in artificial intelligence, internet services, search engines and related products. It has access to the world’s largest domestic addressable population of internet users.

On May 15, shares of Baidu traded around $99.86 for a market cap of $34.36 billion and a price-earnings ratio of 120.33. According to the Peter Lynch chart, the stock is trading above its intrinsic value.

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GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The interest coverage ratio of 2.08 is lower than 95.32% of competitors, but the current ratio of 2.89 indicates enough liquidity to pay short-term debt. The operating margin of 5.74% is about average for the industry, but the ROIC more than doubles the WACC.

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Liberty Global

The firm also invested in 2,000,000 shares of Liberty Global, which had a 1.08% impact on the equity portfolio. During the quarter, shares traded for an average price of $18.87.

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Liberty Global is a telecommunications company headquartered in London. Formed from the 2005 merger of UGC and the international arm of Liberty Media, it is the world’s largest international TV and broadband company.

On May 15, shares of Liberty Global traded around $21.36 for a market cap of $12.96 billion. The price-book ratio of 1.02 and price-sales ratio of 1.25 indicate that the stock could be undervalued.

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GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 5 out of 10. The interest coverage ratio of 0.78 and Altman Z-Score of 0.84 suggest a significant danger of bankruptcy if the company cannot secure additional liquidity. The operating margin of 7.81% is higher than the industry median of 4.57%, but the WACC is higher than the ROIC, suggesting low profitability.

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Petroleo Brasileiro SA Petrobras

After selling out of its previous holding in Petroleo Brasileiro SA Petrobras in the fourth quarter of 2019, the firm bought 3,728,093 new shares of the company, impacting the equity portfolio by 0.71%. Shares traded for an average price of $12.09 during the quarter.

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Petroleo Brasileiro is a semi-public Brazilian petroleum company, 64% of which is owned by the Brazilian government. Commonly known as Petrobras, the company explores for, extracts, refines, markets and supplies oil and natural gas products.

On May 15, shares of Petroleo Brasileiro traded around $6.10 for a market cap of $39.14 billion and a price-earnings ratio of 8.54. The price-book ratio of 0.54 and price-sales ratio of 0.63 indicate a potential value opportunity.

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GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10. The Altman Z-Score of 0.66 suggests that the company has a risk of going bankrupt, but the interest coverage ratio of 2.62 indicates that it can likely make interest payments. The operating margin of 25.2% is higher than 82.81% of competitors, but the WACC is higher than the ROIC.

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Portfolio overview

At the end of the quarter, Oaktree Capital Management held positions in 83 stocks valued at a total of $2.9 billion. The firm established 23 new holdings and had a turnover rate of 19%.

The top holdings were Vistra Energy Corp. (NYSE:VST) with 16.67% of the equity portfolio, TORM PLC (NASDAQ:TRMD) with 14.34% and Star Bulk Carriers Corp. (NASDAQ:SBLK) with 7.59%. In terms of sector weighting, the firm was most invested in energy, utilities and financial services.

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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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