Auxier Asset Management leader Jeff Auxier (Trades, Portfolio) released his second-quarter portfolio earlier this week.
The guru's Oregon-based firm seeks to invest in "compelling, undervalued" companies that have, among other attributes, strong or improving fundamentals, consistent operating results, a significant competitive advantage, understandable products and a demonstrated ability to earn a high return on capital.
In his second-quarter commentary, Auxier discussed how the Covid-19 pandemic has been "horrible for many nonessential segments of the economy and has accelerated digital trends from years to months." In this environment, he noted that the fund's portfolio is currently more attractive based on earnings yield, return on equity and free cash flow yield than anything he has seen in the fixed income market.
"We utilize years of cumulative knowledge and ownership not only to mitigate risk but to be prepared for double play opportunities by knowing intimately the fundamentals of each investment," he wrote. "Rather than trying to predict markets we try to research and monitor daily the operating reality of great managers and businesses that can endure the most challenging economic conditions. There are no shortcuts when protecting ones hard earned savings.
Among the most notable trades the guru made during the quarter was a new position in Raytheon Technologies Corp. (RTX, Financial), which he gained as a result of Raytheon Co. merging with United Technologies Corp. The Allergan PLC holding was also dissolved after the company voluntary delisted as part of its acquisition deal with AbbVie Inc. (ABBV, Financial).
Auxier also established new positions in Forrester Research Inc. (FORR, Financial), Parker Hannifin Corp. (PH, Financial), PayPal Holdings Inc. (PYPL, Financial) and Laboratory Corp of America Holdings (LH, Financial) during the quarter.
Raytheon Technologies
Before the Raytheon-United Technologies deal closed in early April, Auxier held 12,500 shares of Raytheon. In accordance with the merger agreement, shareholders received 2.3348 shares of United Technologies for each Raytheon share held. As such, the guru acquired 30,516 shares of the newly combined company, giving it 0.41% space in the equity portfolio. The stock traded for an average price of $62.35 per share during the quarter.
The Waltham, Massachusetts-based aerospace and defense company has a $93.25 billion market cap; its shares were trading around $60.72 on Friday with a price-book ratio of 1.39 and a price-sales ratio of 0.81.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 6 out of 10, however, leans more toward undervaluation.
GuruFocus rated Raytheon's financial strength 5 out of 10 on the back of weak interest coverage and a low cash-debt ratio of 0.2. The Altman Z-Score of 1.59 also warns the company could be in danger of going bankrupt, especially since assets are building up at a faster rate than revenue is growing, which indicates it may be becoming less efficient.
The company's profitability fared better, scoring an 8 out of 10 rating. In addition to declining margins, Raytheon is being weighed down by negative returns that underperform a majority of competitors. It also has a moderate Piotroski F-Score of 4, which implies business conditions are stable. The predictability rank of three out of five stars, however, is on watch as a result of a slowdown in revenue per share growth over the past 12 months. According to GuruFOcus, companies with this rank return, on average, 8.2% annually over a 10-year period.
Of the gurus invested in Raytheon Technologies, Dodge & Cox has the largest stake with 1.3% of outstanding shares. Other guru shareholders who benefited from the merger include Chris Davis (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Daniel Loeb (Trades, Portfolio), Ken Fisher (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Pioneer Investments (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
Forrester Research
The guru invested in 14,000 shares of Forrester Research, allocating 0.10% of the equity portfolio to the holding. Shares traded for an average price of $31.67 each during the quarter.
Headquartered in Cambridge, Massachusetts, the market research company, which provides insight on existing and potential impacts of technology, has a market cap of $698.67 million; its shares were trading around $36.45 on Friday with a price-earnings ratio of 52.39, a price-book ratio of 4.02 and a price-sales ratio of 1.53.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 6 out of 10, however, is inclined more toward undervaluation.
Forrester Research's financial strength was rated 5 out of 10 by GuruFocus on the back of low interest coverage. The Altman Z-Score of 2.06 also indicates it is under some pressure since its Sloan ratio is indicative of poor earnings quality and assets are building up faster than revenue is growing. The weighted average cost of capital also surpasses the return on invested capital, suggesting it may have trouble turning a profit.
The company's profitability scored a 7 out of 10 rating. In addition to declining margins, returns are underperforming over half of their industry peers. Forrester's Piotroski F-Score, though, is 7, indicating business conditions are healthy. It also has a one-star predictability rank. GuruFocus says companies with this rank typically return an average of 1.1% annually.
With a 5.31% stake, Chuck Royce (Trades, Portfolio) is the company's largest guru shareholder. Simons' firm is also invested in the stock.
Parker Hannifin
Having previously sold out of Parker Hannifin in the first quarter, the investor entered a new 1,420-share position. The trade had an impact of 0.06% on the equity portfolio. The stock traded for an average per-share price of $160.71 during the quarter.
The Cleveland-based industrial company, which specializes in manufacturing motion and control technologies, has a $26.39 billion market cap; its shares were trading around $205.73 on Friday with a price-earnings ratio of 22.1, a price-book ratio of 4.3 and a price-sales ratio of 1.95.
Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 2 out of 10 supports this assessment as the share price and price-sales ratio are near 10-year highs.
GuruFocus rated Parker Hannifin's financial strength 4 out of 10. Although the company has issued approximately $2.4 billion in new long-term debt over the past three years, it is still at a manageable level due to having adequate interest coverage. The Altman Z-Score of 2.26 also indicates it is under some pressure since assets are building up faster than revenue is growing.
The company's profitability fared better, scoring a 7 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 4. As a result of declining revenue per share over the past year, however, the one-star predictability rank is on watch.
Bill Nygren (Trades, Portfolio) is the company's largest guru shareholder with a 1.40% stake. Diamond Hill Capital (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Pioneer, Cohen, Louis Moore Bacon (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Royce, Lee Ainslie (Trades, Portfolio), Grantham, Dodge & Cox and Ray Dalio (Trades, Portfolio) also own the stock.
PayPal
Auxier picked up 1,567 shares of PayPal, dedicating 0.06% of the equity portfolio to the holding. During the quarter, the stock traded for an average price of $137.26 per share.
The company, which is headquartered in Palo Alto, California, operates an online payments platform that supports money transfers and transactions. PayPal has a market cap of $230.32 billion; its shares were trading around $197.16 on Friday with a price-earnings ratio of 90.91, a price-book ratio of 13.18 and a price-sales ratio of 12.23, which GuruFocus notes is near a five-year high.
The Peter Lynch chart suggests the stock is overvalued.
PayPal's financial strength was rated 6 out of 10 by GuruFocus. Despite issuing approximately $8.7 billion in new long-term debt over the past several years, it is at a manageable level due to sufficient interest coverage. The robust Altman Z-Score of 4.02 also indicates it is in good standing. The ROIC also significantly surpasses the WACC, indicating good profit potential.
The company's profitability scored an 8 out of 10 rating on the back of operating margin expansion, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6.
Of the gurus invested in PayPal, Fisher has the largest position with a 0.83% stake. Other top guru shareholders include Steve Mandel (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Pioneer, Spiros Segalas (Trades, Portfolio), PRIMECAP and Chase Coleman (Trades, Portfolio).
Laboratory Corp of America
After previously exiting a position in Laboratory Corp of America in the first quarter, Auxier entered a new 1,385-share holding. The trade had an impact of 0.05% on the equity portfolio. During the quarter, shares traded for an average price of $160.44 each.
More commonly known as LabCorp, the Burlington, North Carolina-based company, which operates one of the largest clinical laboratory networks in the world, has a $17.63 billion market cap; its shares were trading around $180.96 on Friday with a price-earnings ratio of 49.5, a price-book ratio of 2.4 and a price-sales ratio of 1.55.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 5 out of 10, however, is more inclined toward it being fairly valued even though the share price and price-sales ratio are near multiyear highs.
GuruFocus rated LabCorp's financial strength 4 out of 10. While the company has adequate interest coverage, the Altman Z-Score of 2.44 suggests it is under some pressure since assets are building up more quickly than revenue is growing. The ROIC is also below the WACC, indicating potential profitability problems.
The company's profitability scored a 9 out of 10 rating. Although margins are declining, LabCorp's returns are outperforming over half of its competitors and it has a moderate Piotroski F-Score of 5. As a result of revenue growth slowing down over the past year, the five-star predictability rank is on watch. GuruFocus data shows companies with this rank typically return an average of 12.1% annually.
John Rogers (Trades, Portfolio) is LabCorp's largest guru shareholder with 0.77% of outstanding shares. Larry Robbins (Trades, Portfolio), Cohen, Wallace Weitz (Trades, Portfolio), Charles Brands, First Eagle Investment (Trades, Portfolio), Pioneer, Richard Snow (Trades, Portfolio) and several other gurus also have positions in the stock.
Additional trades and portfolio performance
During the quarter, Auxier also added to his holdings of AbbVie, Bristol-Myers Squibb Co. (BMY, Financial) and several other stocks, while reducing a slew of other positions like Biogen Inc. (BIIB, Financial), Abbott Laboratories (ABT, Financial), Microsoft Corp. (MSFT, Financial), Johnson & Johnson (JNJ, Financial) and Intel Corp. (INTC).
About half of the guru's $453 million equity portfolio, which is composed of 147 stocks, is invested in the health care and consumer defensive sectors, followed by an 18% holding in the financial services space.
GuruFocus data shows the Auxier Focus Fund returned 20.2% in 2019, underperforming the S&P 500's 31.48% return.
Disclosure: No positions.
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