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Sydnee Gatewood
Sydnee Gatewood
Articles (2199) 

Causeway's Sarah Ketterer Slashes Holdings of Oil Stocks, Buys Bottling Company

Guru releases 1st-quarter portfolio

Causeway Capital Management leader Sarah Ketterer (Trades, Portfolio) released her first-quarter portfolio last week, disclosing a number of reductions in her energy holdings.

Seeking to post superior risk-adjusted returns, the guru’s Los Angeles-based firm, which she founded with Harry Hartford in 2001, invests in mispriced equities in both developed and emerging markets. The investment team looks for potential opportunities among mid- and large-cap companies using quantitative and value-oriented methods. Each stock also receives a risk score based on the amount of volatility it adds to the portfolio. The team then enters positions in the stocks with the highest expected risk-adjusted returns that also have a lower price-earnings ratio and higher dividend yield than the market.

With these criteria in mind, Ketterer’s firm made 12 new buys in the first quarter, sold out of 13 positions and trimmed or added to a number of other holdings during the quarter. The most significant trades included an 88.77% reduction in the Ovintiv Inc. (NYSE:OVV) stake and complete sales of the Halliburton Co. (NYSE:HAL), Marathon Petroleum Corp. (NYSE:MPC) and Gildan Activewear Inc. (NYSE:GIL) positions. The largest new buy for the three months ended March 31 was Coca-Cola European Partners PLC (NYSE:CCEP).

Ovintiv

Ketterer’s largest trade for the quarter was a 24.2 million-share reduction of her stake in Ovintiv, which had an impact of -6.09% on the equity portfolio. She now holds 3.06 million shares, which represent 0.13% of total assets managed. The stock traded for an average price of $13.45 per share during the quarter.

GuruFocus estimates she has lost 58.53% on the investment since establishing it in the third quarter of 2016.

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The Denver-based oil company, which recently changed its name from Encana Corp., has a $1.59 billion market cap; its shares were trading around $7.29 on Tuesday with a price-earnings ratio of 1.89, a price-book ratio of 0.16 and a price-sales ratio of 0.2.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 10 out of 10 also supports this assessment.

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GuruFocus rated Ovintiv’s financial strength 4 out of 10. In addition to having low interest coverage, the Altman Z-Score of 0.74 warns the company could be in danger of going bankrupt as its revenue per share has declined over the past five years. The return on invested capital of 7.27% is also less than the weighted average cost of capital of 9.71, indicating low profitability.

Regardless, the company’s profitability scored a 6 out of 10 rating, driven by strong margins and returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6, which indicates its operating conditions are stable. Ovintiv also has a business predictability rating of one of five stars. 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 gurus invested in Ovintiv, Dodge & Cox has the largest position with a 14.63% stake. Other top guru shareholders are Chris Davis (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Pioneer Investments (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

Halliburton

The guru divested of her entire stake in Halliburton, selling 10.5 million shares. The trade had an impact of -2.76% on the equity portfolio. Shares traded for an average price of $17.69 each during the quarter.

Based on GuruFocus data, Ketterer lost an estimated 41.47% on the investment.

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The oilfield services provider, which is headquartered in Houston, has a market cap of $10 billion; its shares were trading around $11.11 on Tuesday with a forward price-earnings ratio of 154.76, a price-book ratio of 1.47 and a price-sales ratio of 0.46.

According to the median price-sales chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 also leans toward undervaluation.

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Halliburton’s financial strength was rated 4 out of 10 by GuruFocus on the back of poor interest coverage and an Altman Z-Score that, at 1.98, indicates it is under some financial pressure.

The company’s profitability fared better, scoring a 7 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of its industry peers. Its returns, however, are negative and underperforming versus its history. Halliburton also has a low Piotroski F-Score of 3, which suggests business operations are in poor shape, and a three-star business predictability that is on watch as a result of a decline in revenue per share over the past several years. GuruFocus says companies with this rank typically return an average of 8.2% per year.

With a 5.57% stake, Dodge & Cox is the company’s largest guru shareholder. Richard Pzena (Trades, Portfolio) and Hotchkis & Wiley also have large positions in the stock.

Marathon Petroleum

Another holding that was booted from the portfolio was 3.6 million shares of Marathon Petroleum, which had an impact of -2.37%. The stock traded for an average per-share price of $46.65 during the quarter.

GuruFocus noted the guru lost approximately 22.79% on the investment.

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The Findlay, Ohio-based petroleum refiner has a $22.73 billion market cap; its shares were trading around $34 on Tuesday with a price-book ratio of 0.94 and a price-sales ratio of 0.19.

The price chart below shows the stock is trading below its median price-book ratio and above its median price-sales ratio.

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Weighed down by $9.6 billion in new long-term debt and low interest coverage, GuruFocus rated Marathon’s financial strength 4 out of 10. The Altman Z-Score of 1.52 also warns that the company could be in danger of going bankrupt since it has recorded a loss in operating income and assets are building up faster than revenue. The ROIC is also less than the WACC, suggesting poor profitability.

The company’s profitability scored an 8 out of 10 rating, driven by an expanding operating margin and a moderate Piotroski F-Score of 4. Returns, however, are negative and underperform a majority of competitors. Due to recording a slowdown in revenue per share growth over the past year, the 2.5-star business predictability rank is on watch. GuruFocus says companies with this rank return 7.3% per year on average.

Paul Singer (Trades, Portfolio)’s Elliott Management is the company’s largest guru shareholder with a 1.48% stake. Other top investors include Hotchkis & Wiley, First Eagle Investment (Trades, Portfolio), Pioneer, Greenblatt, Richard Snow (Trades, Portfolio) and Bernard Horn (Trades, Portfolio).

Gildan Activewear

In her fourth-largest sale for the quarter, Ketterer shed the 5.24 million remaining shares of Gildan Activewear. The trade had an impact of -1.66% on the equity portfolio. During the quarter, the stock traded for an average price of $24.35 per share.

According to GuruFocus, the guru gained an estimated 12.87% on the investment.

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The Canadian clothing manufacturer has a market cap of $2.44 billion; its shares were trading around $13.24 on Tuesday with a price-earnings ratio of 20.71, a price-book ratio of 1.51 and a price-sales ratio of 0.99.

The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 7 out of 10, however, leans more toward undervaluation.

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Gildan’s financial strength was rated 5 out of 10 by GuruFocus. Although the company has issued approximately $1.1 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 2.67 also indicates it is under some pressure.

The company’s profitability fared much better, scoring a 9 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers. Due to a decline in revenue per share over the past year, Gildan’s four-star business predictability rank is on watch. According to GuruFocus, stocks with this rank return an average of 9.8% per year.

With a 6.94% stake, Pzena is the company’s largest guru shareholder. Other top guru investors include Simons’ firm, Private Capital (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Pioneer, Dalio, John Hussman (Trades, Portfolio) and Greenblatt.

Coca-Cola European Partners

Ketterer’s largest new buy for the quarter was 3.14 million shares of Coca-Cola European Partners, which was given 1.89% space in the equity portfolio. Shares traded for an average price of $48.81 each during the quarter.

The U.K.-based bottling company, which distributes Coca-Cola products, has a $16.06 billion market cap; its shares were trading around $36.68 on Tuesday with a price-earnings ratio of 14.09, a price-book ratio of 2.57 and a price-sales ratio of 1.35.

According to the Peter Lynch chart, the stock is trading near its fair value.

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GuruFocus rated Coca-Cola European Partners’ financial strength 4 out of 10. While the company has adequate interest coverage, its Altman Z-Score of 1.85 suggests it is under some financial pressure.

The company’s profitability scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitor and a moderate Piotroski F-Score of 6. It also has a one-star business predictability rank.

Of the gurus invested in the company, Barrow, Hanley, Mewhinney & Strauss has the largest stake with 0.87%of outstanding shares. Ketterer is second with 0.69%. Other gurus that hold the stock are Pioneer, Simons’ firm, Steven Cohen (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Dalio.

Additional trades

Other large new positions Ketterer established during the quarter included Broadcom Inc. (NASDAQ:AVGO), Reinsurance Group of America Inc. (NYSE:RGA), Spirit AeroSystems Holdings Inc. (NYSE:SPR) and Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH). She also added to her Ryanair Holdings PLC (NASDAQ:RYAAY) stake.

Additional major sales made during the quarter included a 15.11% cut to the Linde PLC (NYSE:LIN) position and complete divestments of FirstEnergy Corp. (FE) and Signet Jewelers Ltd. (SIG).

Portfolio composition

Ketterer’s $6.26 billion equity portfolio, which is composed of 85 stocks, is largely invested in the technology (19.24%), communication services (17.21%) and basic materials (15.06%) sectors.

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Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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