John Rogers (Trades, Portfolio), the chairman, co-CEO and chief investment officer of Ariel Investments, recently disclosed the firm's portfolio updates for the second quarter of 2020, which ended on June 30.
The Chicago-based firm primarily invests in undervalued small and mid-cap companies that demonstrate sustainable competitive advantages, high barriers to entry, predictable fundamentals, low risk and the potential for double-digit earnings growth. Rogers holds that a patient, long-term, independent and forward-looking approach is essential for generating good returns.
Based on its investing criteria, the firm's top buys for the quarter were Baidu Inc. (BIDU, Financial), Madison Square Garden Entertainment Corp. (MSGE, Financial), Envista Holdings Corp. (NVST, Financial), Core Laboratories NV (CLB, Financial) and Walgreens Boots Alliance Inc. (WBA, Financial).
Baidu
Ariel Investments added 596,360 shares, or 27.85%, to its position in Baidu, impacting the equity portfolio by 1.09%. Shares traded for an average price of $106.71 during the quarter.
Baidu is a Chinese internet and technology giant that specializes in artificial intelligence, internet services and search engines. Its most iconic products are the Baidu search engine and the Baike online encyclopedia.
On Aug. 20, shares of Baidu traded around $122.71 for a market cap of $42.29 billion. According to the Peter Lynch chart, the stock is trading above its intrinsic value.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 1.98 is lower than the industry median of 62.39%, but the Altman Z-Score of 2.17 shows the company is not likely to face liquidity issues. The return on invested capital had fallen below the weighted average cost of capital in recent quarters, indicating a negative return on investments.
Madison Square Garden Entertainment
The firm ended the quarter with 1,080,307 shares of new spinoff Madison Square Garden Entertainment as a result of owning its parent company, which was renamed Madison Square Garden Sports Corp. (MSGS, Financial) after the mid-April spinoff. The position now makes up 1% of the equity portfolio. During the quarter, shares traded for an average price of $77.06.
Madison Square Garden Entertainment is an owner and operator of entertainment venues, including Madison Square Garden, Hulu Theatre, Radio City Music Hall, Beacon Theatre and Chicago Theatre, as well as new venues in London and Las Vegas.
On Aug. 20, shares of Madison Square Garden Entertainment traded around $65.46 for a market cap of $1.57 billion. Since the spinoff, shares are down approximately 27%.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 1 out of 10. The cash-debt ratio of 4.76 is higher than 71.79% of competitors, while the current ratio of 2.8% indicates the company can pay its short-term debts comfortably. In terms of profitability, the company faces headwinds from spinning off during a monumentally bad time for the entertainment industry due to the pandemic, but in terms of its balance sheet and long-established reputation, it is in better shape to weather the storm than many of its peers.
Envista Holdings
The firm increased its stake in Envista Holdings by 2,657,291 shares, or 76.2%, impacting the equity portfolio by 0.85%. Shares traded for an average price of $18.67 during the quarter.
Envista is a holding company of three subsidiaries and more than 30 dental brands. Headquartered in Brea, California, the company's subsidiaries produce and sell a range of dental consumables, equipment and services to dental professionals in the U.S.
On Aug. 20, shares of Envista traded around $23.42 for a market cap of $3.73 billion. According to the Peter Lynch chart, 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 3 out of 10. The cash-debt ratio of 0.38 is lower than 77.21% of competitors, but the debt-to-revenue ratio of 0.89 is a positive sign. The operating margin and net margin have typically been above 10% and 7%, respectively, before dropping into the negatives in 2020.
Core Laboratories
The firm established a new holding of 2,084,533 shares in Core Laboratories, impacting the equity portfolio by 0.65%. During the quarter, shares traded for an average price of $17.74.
Based in the Netherlands, Core Laboratories provides core and fluid analysis to the petroleum industry, specializing in basic rock properties, special core analysis and PVT characterization of reservoir fluids. Founded in 1941, it was one of the first mobile core analysis companies operating in the industry.
On Aug. 20, shares of Core Laboratories traded around $23.79 for a market cap of $1.06 billion. According to the Peter Lynch chart, the stock is trading below its intrinsic value.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.06 is lower than 79.72% of competitors, but the Altman Z-Score of 2.07 indicates the company is not likely at risk of bankruptcy. The company has a three-year revenue growth rate of 3.5% and a three-year earnings per share without non-recurring items growth rate of 12.3%.
Walgreens Boots Alliance
The firm also took a new position worth 689,297 shares in Walgreens Boots Alliance, which had a 0.45% impact on the equity portfolio. Shares traded for an average price of $42.49 during the quarter.
Walgreens Boots Alliance is a pharmacy company involved in the retail, wholesale and distribution of pharmaceutical and adjacent products. Headquartered in Chicago, the company is the owner of the Walgreens pharmacy chain in the U.S. and the U.K.-based health and beauty retailer Boots.
On Aug. 20, shares of Walgreens Boots Alliance traded around $40.25 for a market cap of $34.88 billion. According to the Peter Lynch chart, the stock is overvalued based on recent earnings but trading below its intrinsic value compared to earnings over the past five years.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.02 and current ratio of 0.69 indicate that the company may need to raise additional liquidity to pay its short-term debts. The ROIC has been in a downtrend in recent years, indicating issues with profitability.
Portfolio overview
As of the quarter's end, the firm held 147 common stock positions valued at a total of $6.57 billion. The top holdings were Microsoft Corp. (MSFT) with 5.08% of the equity portfolio, Baidu with 5% and Philip Morris International Inc. (PM) with 4.73%.
In terms of sector weighting, the firm was most invested in financial services and communication services, followed by industrials and technology.
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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