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Graham Griffin
Graham Griffin
Articles (63) 

PepsiCo Slashed in David Carlson's 2nd-Quarter Portfolio

Soda company amongst stocks facing the chopping block

David Carlson (Trades, Portfolio), chief investment officer of Elfun Trusts, has revealed the fund’s second-quarter portfolio. Changes include major reductions of the PepsiCo Inc. (NASDAQ:PEP) and S&P Global Inc. (NYSE:SPGI) holdings alongside cutting Gilead Sciences Inc. (NASDAQ:GILD) and Booking Holdings Inc. (NASDAQ:BKNG) from the portfolio entirely.

The fund seeks to achieve its investment objectives by investing in equity securities of U.S. companies, such as common and preferred stocks. Managers select equity securities from a number of industries based on the merits of individual companies. In seeking to satisfy the investment objective with respect to future income, managers also consider companies that have the potential to pay dividends in the future. Stock selection is key to the performance of the fund.

Portfolio overview

The portfolio contains 43 stocks, with two new holdings. The new holdings to the portfolio are Trane Technologies PLC (NYSE:TT) and Martin Marietta Materials Inc. (NYSE:MLM). The portfolio is valued at $2.88 billion and has seen a turnover rate of 3%.

Top holdings in the portfolio include Microsoft Corp. (NASDAQ:MSFT), Amazon.com Inc. (NASDAQ:AMZN), Visa Inc. (NYSE:V), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc. (NASDAQ:GOOG).

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By weight, the top three sectors are technology (25.87%), health care (17.46%) and financial services (15.36%).

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S&P Global

The second quarter saw the holding of S&P Global slashed by 68,900 shares. Overall, the sale represented a 25.82% reduction in the holding as shares were sold at an average price of $299.77. The equity portfolio was impacted by -0.71% from the sale and GuruFocus estimates the total gain of the holding at 163.79%.

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S&P Global is not only the world's largest provider of credit ratings and indexes, it offers complimentary data, research and analytical tools to capital market participants. Within credit ratings, S&P is the largest of the big three nationally recognized statistical rating organizations alongside Moody's and Fitch.

On Aug. 3, the shares were trading at $350.43 with a market cap of $84.57 billion. The Peter Lynch chart suggests that the stock has been consistently overvalued since 2017.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 1 out of 10. Currently, a severe warning sign is issued for assets growing faster than revenue. The return on invested capital significantly outweighs the weighted average cost of capital.

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PepsiCo

Shares of PepsiCo were sold off, representing a 14.19% reduction in the holding. Around 103,600 shares were sold at an average price of $131.65. Overall, the sale had a -0.52% impact on the portfolio and GuruFocus estimates the total gain at 39.37%.

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PepsiCo is one of the largest food and beverage companies globally. It makes, markets and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays and Ruffles. The company uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks (SBUX).

Aug. 3 saw PepsiCo shares trading at $136.60 with a market cap of $189.56 billion. The Peter Lynch chart suggests the stock was trading close to fair value at the end of 2019, but has since become overvalued.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 2 out of 10. The current cash-to-debt ratio places the company lower than 66.30% of the industry despite reductions in debt since 2017. An Altman Z-Score of 3.57 places the company well into the safe zone, away from bankruptcy.

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Gilead Sciences

The holding of Gilead Sciences was cut from the portfolio entirely after seeing a major reduction in the first quarter. The remaining 145,375 shares were sold around an average price of $76.51. The cut had an impact of -0.46% on the portfolio and GuruFocus estimates the total loss at 23.21%.

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Gilead Sciences develops and markets therapies to treat life-threatening infectious diseases, with the core of its portfolio focused on HIV and hepatitis B and C. The acquisitions of Corus Pharma, Myogen, CV Therapeutics, Arresto Biosciences and Calistoga have broadened this focus to include pulmonary and cardiovascular diseases and cancer. Gilead's acquisition of Pharmasset brought rights to hepatitis C drug Sovaldi, which is also part of combination drug Harvoni, and the Kite acquisition boosted Gilead's exposure to cell therapy in oncology.

On Aug. 3, Gilead was trading at $71.85 per share with a market cap of $90.11 billion. According to the Peter Lynch chart, the stock has seen some major valuation swings over the last several years and is likely trading close to intrinsic value.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 5 out of 10. Three severe warning signs are issued for declining gross margin percentage, declining operating margin percentage and declining revenue per share. Between 2015 and 2018, the company saw cash flows steadily decline before making a small comeback in 2019.

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Booking Holdings

The company also got the axe in the second quarter after being added in the third quarter of 2018. The 8,000 shares of Booking were sold at an average price of $1,519.55. Overall the sale had an impact of -0.45% on the equity portfolio and GuruFocus estimates the total loss at 19.18%.

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Booking is the world's largest online travel agency by revenue, offering booking services for hotel and vacation rooms, airline tickets, rental cars, restaurant reservations, cruises, experiences and other vacation packages. The company operates a number of branded travel booking sites, including Priceline.com, Booking.com, Agoda, OpenTable and Rentalcars.com, and has expanded into travel media with the acquisitions of Kayak and Momondo.

Aug. 3 saw the stock trading at $1,650.92 per share with a market cap of $67.54 billion. According to the Peter Lynch chart, the company has been trading above intrinsic value for the last several years.

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GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 6 out of 10. One severe warning sign is issued for the Sloan ratio, which indicates poor earnings quality. The current cash-to-debt ratio surpasses 59.69% of the industry. The operating margin and net margin percentages beat at least 90% of the industry.

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Disclaimer: Author owns no stocks mentioned.

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