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Margaret Moran
Margaret Moran
Articles (290) 

Top 2nd-Quarter Trades of First Pacific Advisors

Firm invests in companies facing short-term headwinds

First Pacific Advisors (Trades, Portfolio) recently released its portfolio updates for the second quarter of 2020, which ended on June 30.

The Los Angeles-based investment management firm emphasizes a research-based, low-risk value investing strategy that seeks to increase capital in the long term while avoiding a high chance of loss. With 88 employees and 31 investment professionals led by Chief Financial Officer J. Richard Atwood, First Pacific invests through several funds, including the FPA Capital Fund (Trades, Portfolio), the FPA Crescent Fund, the FPA International Value Fund and the FPA Paramount Fund.

Based on its investing criteria, the firm's biggest sells for the second quarter of 2020 were JD.com Inc. (NASDAQ:JD), DuPont de Nemours Inc. (NYSE:DD) and Raytheon Technologies Corp. (NYSE:RTX). The firm was less active in terms of buys, with the biggest moves being additions to its investments in Marriott International Inc. (NASDAQ:MAR) and Aon PLC (NYSE:AON).

JD.com Inc.

First Pacific Advisors (Trades, Portfolio) sold out of its 3,248,187-share stake in JD.com, impacting the equity portfolio by -1.87%. During the quarter, shares traded for an average price of $50.34.

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JD.com, which is also known as Jingdong and formerly called 360buy, is one of the two largest business-to-consumer e-commerce companies in China in terms of transaction volume and revenue, the other being Alibaba's (BABA) Tmall. The majority of its revenue is derived from online direct sales.

On Aug. 12, shares of JD.com traded around $63.23 for a market cap of $98.33 billion and a price-earnings ratio of 110.36. According to the Peter Lynch chart, the stock is trading above its fair value.

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GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 2.12 is higher than 76.72% of competitors, while the Altman Z-Score of 4.69 indicates the company is not in danger of bankruptcy. The company has a three-year revenue growth rate of 23.45% and a three-year earnings per share without non-recurring items growth rate of 28%.

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DuPont de Nemours

The firm exited out of its 3,662,992-share investment in DuPont de Nemours, which had a -1.77% impact on the equity portfolio. Share traded for an average price of $46.28 during the quarter.

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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 Aug. 12, DuPont's shares traded around $58.74 for a market cap of $43.09 billion. Net income fell into the negatives for the last two quarters.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 5 out of 10. The Altman Z-Score of 0.92 suggests the company could be in danger of bankruptcy, though the interest coverage ratio of 2.96 indicates it can pay its immediate debts. The weighted average cost of capital has been higher than the return on invested capital in recent quarters, indicating the company's operations are not profitable.

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Raytheon Technologies

The firm also sold all 2,269,645 shares of its Raytheon Technologies holding, impacting the equity portfolio by -1.67%. During the quarter, shares traded for an average price of $62.35.

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Raytheon Technologies is a global defense company that was recently formed from the merger of Raytheon Co. and United Technologies in April. Sharpening its focus on aerospace and defense, the company spun off some of its other businesses before the merger, including the elevators division (Otis Worldwide Corp. (OTIS)) and the HVAC division (Carrier Global Corp. (CARR)).

On Aug. 12, Raytheon Technology's shares traded around $63.82 for a market cap of $97.48 billion. Net income fell into the negatives for the most recent quarter.

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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 0.2, which is lower than 74.18% of competitors, indicates potential financial difficulties, as does the low Altman Z-Score of 1.62. The ROIC has declined below the WACC in recent years, indicating that the company is becoming less profitable.

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Marriott International

The firm added 808,188 shares to its position in Marriott International Inc., increasing the stake by 161.29% for a total of 1,309,271 shares. The trade had a 0.93% impact on the equity portfolio. Shares traded for an average price of $86.65 during the quarter.

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Marriott is a multinational hospitality company that manages and franchises a wide variety of hotels and other lodging facilities. It is based in Bethesda, Maryland and operates through over 7,000 properties in 131 countries.

On Aug. 12, shares of Marriott International traded around $96.31 for a market cap of $31.27 billion and a price-earnings ratio of 70.14. According to the Peter Lynch chart, the stock is trading above its fair value.

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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 Altman Z-Score of 1.93 and current ratio of 0.67 show that the company will likely need to take on additional debt to continue operating. The company's margins have been decreasing in recent years, but the net margin of 6.07% at the end of 2019 was above average for the industry.

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Aon

The firm also upped its stake in Aon by 136,393 shares, or 18.13%, for a total investment of 888,523 shares. The trade had a 0.35% impact on the equity portfolio. During the quarter, shares traded for an average price of $186.19.

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Based in London, Aon is a British global insurance firm that sells a range of financial risk-mitigation products, including insurance, reinsurance and pension administration plans. It operates in 120 countries, and its biggest segment in terms of assets under management is the retirement segment.

On Aug. 12, shares of Aon traded around $193.36 for a market cap of $44.79 billion and a price-earnings ratio of 25.8. According to the Peter Lynch chart, the stock is trading above its fair value.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The interest coverage ratio of 7.63 is lower than 63.96% of competitors, while the Altman Z-Score of 1.69 indicates that company faces some risk of bankruptcy. With an operating margin of 22.92%, which is higher than 84.91% of competitors, the company has most often achieved ROIC that surpasses WACC in recent quarters, indicating profitability.

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Portfolio overview

As of the quarter's end, the firm held 142 common stock positions valued at a total of $7.43 billion. Its top holdings were Comcast Corp. (CMCSA) with 6.18% of the equity portfolio, American International Group Inc. (AIG) with 5.61% and Broadcom Inc. (AVGO) with 5.60%.

In terms of sector weighting, the firm was most invested in communication services, financial services and technology.

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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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