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Sydnee Gatewood
Sydnee Gatewood
Articles (3534) 

ValueAct Dives Into EV Maker Nikola

Hedge fund releases 2nd-quarter portfolio

ValueAct Holdings LP (Trades, Portfolio), the investment firm founded by Jeff Ubben in 2000, disclosed its portfolio for the second quarter last week.

Known for its activist investments, the San Francisco-based hedge fund concentrates on acquiring significant ownership stakes in companies it believes are fundamentally undervalued. The investment team seeks out-of-favor companies that are mispriced for a specific reason; ValueAct then works productively with management to maximize shareholder value. After stepping down as chief investment officer in July 2017, handing the reins to Mason Morfit, Ubben announced in June he left the firm to pursue social investing.

Notable trades for the quarter included a new stake in Nikola Corp. (NASDAQ:NKLA) as well as additions to the Enviva Partners LP (NYSE:EVA) and The AES Corp. (NYSE:AES) stakes. The firm's position in The Stars Group Inc. (TSG) was also dissolved, while the Outfront Media Inc. (NYSE:OUT) holding was eliminated.

Nikola

ValueAct invested in 11.7 million shares of Nikola, allocating 9.03% of the equity portfolio to the stake. The stock traded for an average price of $64.74 per share during the quarter. It is now the firm's fourth-largest holding.

The Phoenix-based company, which manufactures zero-emissions heavy trucks and other electric vehicles, has a $16.12 billion market cap; its shares were trading around $42.53 on Thursday with a price-book ratio of 17.41.

Since its initial public offering in June, GuruFocus estimates the stock has gained 25%.

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GuruFocus rated Nikola's financial strength 5 out of 10. While the company currently has no long-term debt, its margins and returns are negative and underperform a majority of competitors.

With a 3.08% stake, ValueAct is currently Nikola's largest guru shareholder. Philippe Laffont (Trades, Portfolio) also owns the stock.

Enviva Partners

The firm boosted its stake in Enviva Partners by 91.32%, buying 2.3 million shares. The transaction had an impact of 0.95% on the equity portfolio. Shares traded for an average price of $33.08 each during the quarter.

ValueAct now holds a total of 4.8 million shares, which represent 1.99% of the total assets managed. GuruFocus data shows the firm has gained an estimated 32.15% on the investment since the second quarter of 2018.

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Headquartered in Bethesda, Maryland, the company, which produces industrial wood pellets, has a market cap of $1.67 billion; its shares were trading around $41.99 on Thursday with a price-earnings ratio of 107.94, a price-book ratio of 3.81 and a price-sales ratio of 1.96.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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Enviva's financial strength was rated 3 out of 10 by GuruFocus. As a result of issuing approximately $252.8 million in new long-term debt over the past three years, the company has low interest coverage. In addition, the Altman Z-Score of 2.26 indicates it is under some pressure since assets are building up at a faster rate than revenue is growing and operating income has been declining.

The company's profitability scored a 5 out of 10 rating on the back of an expanding operating margin, returns that outperform over half of industry peers and a high Piotroski F-Score of 7, which indicates business conditions are healthy. Enviva has also recorded a slowdown in revenue per share growth over the past 12 months.

ValueAct holds a 12.16% stake in Enviva.

AES

ValueAct upped its position in AES by 23.01%, buying 1 million shares. The trade impacted the equity portfolio by 0.17%. The stock traded for an average per-share price of $13.16 during the quarter.

The firm now holds a total of 5.34 million shares, which account for 0.89% of the equity portfolio. GuruFocus data shows the firm has gained an estimated 18.56% on the investment since the second quarter of 2018.

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The Arlington, Virginia-based utility company has an $11.72 billion market cap; its shares were trading around 17.62 on Thursday with a price-earnings ratio of 58.73, a price-book ratio of 4.76 and a price-sales ratio of 1.23.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 2 out of 10 also supports this assessment since the price-earnings and price-book ratios are nearing multiyear highs.

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GuruFocus rated AES's financial strength 3 out of 10. Due to issuing approximately $2 billion in new long-term debt over the past several years, the company has low interest coverage. The Altman Z-Score of 0.69 also warns the company could be in danger of going bankrupt.

The company's profitability scored a 6 out of 10 rating, driven by operating margin expansion and a moderate Piotroski F-Score of 5, which indicates business conditions are stable. Returns, on the other hand, are underperforming over half of its competitors. The predictability rank of one out of five stars is on watch as a result of declining revenue per share. According to GuruFocus, companies with this rank typically return an average of 1.1% annually over a 10-year period.

Of the gurus invested in AES, Jim Simons (Trades, Portfolio)' Renaissance Technologies has the largest stake with 1.5% of outstanding shares. Other top guru shareholders are Caxton Associates (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Leon Cooperman (Trades, Portfolio).

Stars Group

Impacting the equity portfolio by -4%, ValueAct's 13.63 million-share stake in Stars Group was dissolved following its merger with Flutter Entertainment PLC (LSE:FLTR). During the quarter, the stock traded for an average price of $23.53 per share.

GuruFocus says the firm gained an estimated 32.34% on the investment since establishing it in the second quarter of 2019.

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The Canadian online gambling company first announced the all-stock combination with Flutter in October 2019. According to the terms of the agreement, shareholders of Stars Group received 0.2253 ordinary shares of Flutter for each share owned. The deal with the U.K.-based sports betting and gaming company closed on May 5.

Other gurus who benefited from the deal were Jeremy Grantham (Trades, Portfolio), Gabelli, Lee Ainslie (Trades, Portfolio), Pioneer, Ron Baron (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).

Outfront Media

With an impact of -0.66% on the equity portfolio, the hedge fund sold all 3.43 million shares of Outfront Media. Shares traded for an average price of $14.24 each during the quarter.

According to GuruFocus, the firm lost an estimated 43.33% on the investment since establishing it in the fourth quarter of 2019.

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The real estate investment trust, which is headquartered in New York, focuses on advertising space through its portfolio of billboards and transit displays. The company has a market cap of $2.22 billion; its shares were trading around $15.40 on Thursday with a price-earnings ratio of 86.28, a price-book ratio of 2.3 and a price-sales ratio of 1.44.

Based on the Peter Lynch chart, the stock appears to be overvalued.

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Outfront Media's financial strength was rated 3 out of 10 by GuruFocus. As a result of issuing approximately $473.5 million in new long-term debt over the past three years, the company has low interest coverage. In addition, the Altman Z-Score of 0.47 warns the company could be in danger of bankruptcy due to a continual loss in operating income and declining revenue per share. The return on invested capital is also below the weighted average cost of capital, suggesting it may have trouble turning a profit.

The REIT's profitability fared better, scoring a 7 out of 10 rating. Although the operating margin is expanding, the returns are underperforming a majority of industry peers. Outfront Media is also being supported by a moderate Piotroski F-Score of 5.

Tom Russo (Trades, Portfolio) is the company's largest guru shareholder with 0.22% of outstanding shares. Cohen, Jones, Greenblatt, Simons' firm and Caxton Associates (Trades, Portfolio) also have positions in the stock.

Additional trades and portfolio composition

During the quarter, ValueAct also sold out of its positions in Comcast Corp. (NASDAQ:CMCSA) and HD Supply Holdings Inc. (NASDAQ:HDS), trimmed its holdings of Strategic Education Inc. (NASDAQ:STRA) and BP PLC (NYSE:BP) and added to its investment in CBRE Group Inc. (CBRE).

Over 40% of the firm's $8.74 billion equity portfolio, which consists of 21 stocks, is invested in the financial services sector, followed by smaller exposures to the technology and consumer cyclical spaces.

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Disclosure: No positions.

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