The Smead Value Fund (Trades, Portfolio) recently disclosed its portfolio updates for its fiscal second quarter of 2020, which ended on May 31.
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.
Based on its investing criteria, the fund’s biggest trade for the quarter was the sale of its 1,918,422-share stake of Occidental Petroleum (OXY), which had a -5.42% impact on the equity portfolio. The fund also sold out of Walgreens Boots Alliance (WBA) and Aflac (AFL). It also established four new holdings: Simon Property Group Inc. (SPG, Financial), Credit Acceptance Corp. (CACC, Financial), Ulta Beauty Inc. (ULTA, Financial) and Carter's Inc. (CRI, Financial).
Simon Property Group
The Smead Value Fund (Trades, Portfolio) established a new position of 316,958 shares in Simon Property Group, impacting the equity portfolio by 1.93%. During the quarter, shares traded for an average price of $64.34.
Indiana-based Simon Property Group is the largest real estate investment trust and shopping mall operator in the U.S. Together with apparel-licensing firm Authentic Brands Group, it makes up Sparc Group LLC.
The REIT has cut its quarterly dividend by 38% to $1.30 per share due to pandemic-related cash flow issues.
On July 27, Simon Property Group traded around $60.57 for a market cap of $18.52 billion and a price-earnings ratio of 9.52. The Peter Lynch chart indicates that the stock is trading at a discount to its intrinsic value.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 8 out of 10. The Altman Z-Score of 0.65 indicates potential bankruptcy, but the cash-debt ratio of 0.13 is higher than 65.31% of competitors. The operating margin and net margin declined in recent quarters, though both are still above 2015 levels.
Credit Acceptance
The fund also invested in 48,268 shares of Credit Acceptance, which had a 1.88% impact on the equity portfolio. Shares traded for an average price of $314.90 during the quarter.
Credit Acceptance is an automobile financing company based in Michigan. It provides loans and other financial products through a network of dealer-partners, specializing in providing for customers with bad credit or no credit history.
The credit services company does not pay dividends.
On July 27, Credit Acceptance traded around $455.31 for a market cap of $8.04 billion and a price-earnings ratio of 21.28. The Peter Lynch chart indicates that the stock is trading near its intrinsic value.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 9 out of 10. The interest coverage ratio of 3.69 is lower than 81.5% of competitors, but the Altman Z-Score indicates the company’s risk of bankruptcy in the next two years is still low, which is supported by the current ratio of 28.62%. The company has grown its top line steadily, though the bottom line took a hit in the most recent quarter, despite holding steady during the financial crisis.
Ulta Beauty
The fund established a new holding of 44,056 shares in Ulta Beauty, impacting the equity portfolio by 1.13%. During the quarter, shares traded for an average price of $205.53.
Ulta Beauty is a beauty salon retailer headquartered in Illinois. It offers both prestige and mass cosmetics, makeup, fragrances, hair and skin care products, among others, through its brick-and-mortar stores and online.
On July 27, shares of Ulta Beauty traded around $203.71 for a market cap of $11.47 billion and a price-earnings ratio of 27.13. The Peter Lynch chart indicates that the stock is trading above its intrinsic value, but below its median historical valuation.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 9 out of 10. The cash-debt ratio of 0.41 is near the industry median, while the Altman Z-Score of 4 indicates that the company is safe from bankruptcy in the next two years. For the most recent quarter, the return on invested capital was lower than the weighted average cost of capital, indicating profitability issues, though the comparison was favorable for the fiscal year.
Carter's
The fund invested in 116,467 shares of Carter's, which impacted the equity portfolio by 1.05%. Shares traded for an average price of $76.28 during the quarter.
Carter’s is an American children’s apparel company based in Atlanta. It sells its products through Carter’s and OshKosh B’gosh retail stores, as well as through its online channel
On July 27, shares of Carter’s traded around $87.71 for a market cap of $3.83 billion and a price-earnings ratio of 26.57. The Peter Lynch chart indicates that the stock is trading above its intrinsic value.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The cash-debt ratio of 0.37, interest coverage ratio of 8.35 and current ratio of 3.72 indicate that the company is in a strong position to pay off its short-term creditors. The three-year revenue growth rate of 7.4% is higher than 66.81% of competitors, while the three-year Ebitda growth rate of 1.6% is about average for the industry.
Portfolio overview
As of the quarter’s end, the Smead Value Fund (Trades, Portfolio) held common stock positions in 28 companies valued at a total of $949 million, with a turnover rate of 8% for the period. The top holdings were Target Corp. (TGT) with 6.96% of the equity portfolio, NVR Inc. (NVR) with 6.8% and Amgen Inc. (AMGN) with 6.64%.
In terms of sector weighting, the fund was most invested in the consumer cyclical, financial services and health care industries.
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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