Southeastern Asset Management recently disclosed its portfolio updates for the first quarter of 2020.
Founded by Mason Hawkins (Trades, Portfolio) in 1975, the Memphis, Tennessee-based firm manages the Longleaf Partners Funds. The firm employs a fundamental, bottom-up appraisal process based on in-house research in order to select a concentrated portfolio of quality investments that have strong balance sheets, good management teams and attractive valuations.
According to its investment criteria, the firm made five new buys, sold out of two positions and added to or reduced several other holdings for a quarter turnover ratio of 14%. The top buys for the quarter were in DuPont de Nemours Inc. (DD, Financial), Hyatt Hotels Corp. (H, Financial) and Williams Companies Inc. (WMB, Financial).
DuPont de Nemours
The firm established a 4,905,471-share stake in DuPont de Nemours after selling out of its previous investment in the company in the first quarter of 2019. The trade had a 3.98% impact on the equity portfolio. During the quarter, shares traded for an average price of $49.25.
Dupont de Nemours is an American chemicals company that was formed from the 2017 merger of Dow Chemical and Dupont and the subsequent spinoffs of Dow Inc. (DOW) and Corteva Inc. (CTVA). The company makes a variety of chemicals, pharmaceuticals, synthetic fibers, petroleum-based fuels, building materials, cosmetic chemicals, packaging and agricultural chemicals.
On May 20, DuPont’s shares traded around $48.88 for a market cap of $35.65 billion. According to Morningstar analyst estimates, the forward price-earnings ratio is 16.29. The price-book ratio of 0.92 suggests a potential value opportunity, but the price-sales ratio of 1.72 suggests the opposite.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.09 is lower than 87.13% of competitors, while the Altman Z-Score of 0.9 indicates that the company could be in danger of bankruptcy. The operating margin of 12.04% is above the industry median of 7.09%, but the return on invested capital is below the weighted average cost of capital, indicating that the company’s recent operations were not profitable.
Hyatt Hotels
The firm established a new position of 2,333,825 shares in Hyatt Hotels during the first quarter, then added and additional 1,689,216 shares on May 11 according to GuruFocus Real-Time Picks. The total holding is worth 4,023,041 shares, making up 2.66% of the equity portfolio. Shares traded for an average price of $53.09 during the first quarter and $76.20 on May 11.
Hyatt is a Chicago-based hospitality company that operates a chain of luxury and business hotels, resorts and vacation properties under 20 different brand names. At the end of 2019, the company’s portfolio consisted of more than 900 properties in 65 countries, primarily concentrated in the U.S. market.
On May 20, shares of Hyatt traded around $54.08 for a market cap of $5.51 billion and a price-earnings ratio of 9.56. According to the Peter Lynch chart, the stock is trading below its intrinsic value.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.53 is higher than 52.84% of competitors, while the Altman Z-Score of 2.38 and current ratio of 1.48 indicate that the company is unlikely to go bankrupt. For the first quarter of 2020, the company turned a net loss of $103 million at an operating margin of 3.67%, though the company has a history of profitable operations over the past few years.
Williams Companies
The firm also bought an additional 5,315,992 shares of Williams Companies, upping the stake by 64.63% to a total of 13,541,405 shares and impacting the equity portfolio by 1.79%. During the quarter, shares traded for an average price of $19.53.
Williams Companies is an energy company based in Tulsa, Oklahoma. It mainly processes, builds infrastructure for and transports natural gas, though it also has some petroleum and alternative electricity generation assets.
On May 20, shares of the company traded around $19.67 apiece for a market cap of $23.85 billion and a price-earnings ratio of 179.37. According to the Peter Lynch chart, the stock may be overvalued compared to recent earnings.
GuruFocus gives Williams Companies a financial strength score of 3 out of 10 and a profitability score of 6 out of 10. The cash-debt ratio of 0.02 and Altman-Z score of 0.36 indicate that the company may have trouble paying its debt and could be at risk of bankruptcy. The operating margin of 29.11% is higher than the 86.28% of competitors, though the WACC surpasses the ROIC, indicating low overall profitability.
Porfolio overview
As of May 20, Southeastern’s equity portfolio consisted of holdings in 34 stocks valued at a total of $4.2 billion. The top holdings were CenturyLink Inc. (CTL) with 15.12% of the equity portfolio, FedEx Corp. (FDX) with 7.40% and General Electric Co. (GE) with 6.45%.
In terms of sector weighting, the firm was most invested in communication services, industrials and consumer cyclical.
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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