Chris Davis (Trades, Portfolio) has revealed his second-quarter portfolio. Major trades include selling out of Raytheon Technologies Corp. (RTX, Financial) and Magnolia Oil & Gas Corp. (MGY, Financial), new buys in Carrier Global Corp. (CARR, Financial) and Mohawk Industries Inc. (MHK, Financial) and a reduction in his top holding Amazon.com Inc. (AMZN, Financial).
Davis purchases durable, well-managed businesses that can be purchased at value prices and held for four to seven years on average. Davis focuses primarily on financial services companies and he looks to buy companies when they are out of favor.
Portfolio overview
Davis' portfolio contained 119 stocks, with seven new holdings at the end of the second quarter. It was valued at $17.29 billion with a turnover rate of 6%. Top holdings include Amazon (8.44%), Alphabet Inc. (GOOG, Financial)(6.45%), Capital One Financial Corp. (COF, Financial)(5.85%), Applied Materials Inc. (AMAT, Financial)(5.69%) and Facebook Inc. (FB, Financial)(5.48%).
By weight, the top three sectors in the portfolio are financial services (34.77%), communication services (16.32%) and consumer cyclical (14.52%).
Raytheon
The guru sold out of Raytheon, affecting the portfolio by -0.93%. The 1.04 million shares were sold at an average price of $123.51 after being purchased in the first quarter. GuruFocus estimates the total loss of the holding at 38.02%.
Raytheon is a U.S. defense contractor that posted just over $27 billion in sales during 2018. It operates through five segments: integrated defense systems, intelligence and information, missile systems, space and airborne systems and a cybersecurity business branded Forcepoint. Sales to the U.S. government account for about 70% of consolidated revenue. Based in Waltham, Massachusetts, Raytheon employs more than 60,000 people.
On Aug. 21, Raytheon was trading at $116.96 with a market cap of $32.57 billion. According to the Peter Lynch chart, the stock was trading above intrinsic value prior to this year.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rank of 9 out of 10. The current cash-to-debt ratio of 0.79 places the company above others in the aerospace and defense industry. Operating and net margin percentages also place the company well above industry standards with revenue increasing over the last several years.
Magnolia Oil & Gas
Davis also sold out of his holding of Magnolia Oil & Gas after purchasing additional shares at the beginning of the year. His remaining 12.20 million shares were sold at an average price of $5.43. The sale had an impact of -0.33% on the portfolio and GuruFocus estimates the total loss on the holding at 55.11%.
Magnolia Oil & Gas is an independent oil producer with assets located in the Eagle Ford Shale and Austin Chalk formations in South Texas. Its objective is to generate stock market value over the long term through consistent organic production growth, high full-cycle operating margins, an efficient capital program with short economic paybacks, significant free cash flow after capital expenditures and effective reinvestment of free cash flow. Its assets are located at Karnes County and Giddings Field. The company's operating segment is acquisition, development, exploration and production of oil and natural gas properties located in the United States.
Aug. 21 saw shares trading at $6.01 with a market cap of $1.52 billion. The Peter Lynch chart suggests that the stock was trading above intrinsic value throughout most of 2019.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 4 out of 10. An Altman Z-Score of -3.57 places the company well into the distress column with bankruptcy a possibility in the next two years. The weighted average cost of capital outweighs the return on invested capital, indicating valuation struggles moving forward.
Carrier Global
Davis' largest new buy of the quarter was the establishment of his holding in Carrier Global. He purchased 30.57 million shares at an average price of $18.38. The purchase had an impact of 3.93% on the portfolio and GuruFocus estimates the total gain at 61.59% already.
Carrier Global manufactures heating, ventilation and air-conditioning, refrigeration and fire and security products. Carrier's HVAC business serves both residential and commercial markets. Carrier's refrigeration segment consists of its transportation refrigeration, Sensitech supply-chain monitoring and commercial refrigeration businesses. The company's fire and security business manufactures fire detection and suppression, access controls and intrusion detection products.
Shares were trading at $29.61 with a market cap of $25.76 billion on Aug. 21. The Peter Lynch chart suggests that recently the company has been trading below intrinsic value.
GuruFocus gives the company a financial strength rating of 8 out of 10 and a profitability rank of 4 out of 10. The company has numerous medium warning signs issued, but there are no severe warning signs currently. The company issued debt in 2019 while cash flows have remained relatively stable since 2017.
Mohawk Industries
Davis also established a new holding in Mohawk Industries. The guru purchased 62,175 shares at an average price of $87.72. The purchase had a 0.04% impact on the portfolio and GuruFocus estimates the total gain on the holding at 2.50%.
Mohawk Industries manufactures a wide range of flooring products, including carpets, rugs, ceramic tile, laminate, wood, luxury vinyl tile and vinyl flooring. The Georgia-based company has grown from a U.S.-focused carpeting manufacturer to a leading global player in the diversified flooring market. Mohawk operates three reporting segments: global ceramic, North America flooring and rest of the world flooring. The company generates approximately 60% of its sales in the United States.
On Aug. 21, shares were trading at $89.80 with a market cap of $6.39 billion. The Peter Lynch chart suggests the shares have been trading below intrinsic value over the last two years.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 9 out of 10. There are currently two severe warning signs issued for assets growing faster than revenue and a declining operating margin percentage. The current cash-to-debt ratio of 0.24 places the company lower than 73.40% of the industry. The company has maintained steadily increasing revenue over the last several years.
Amazon
Davis maintained his current trend of decreasing his holding in Amazon in the second quarter. He sold 10,389 shares at an average price of $2,403.24. The sale had an impact of -0.14% on the portfolio and GuruFocus estimates the total gain of the holding at 219.43%. Davis has been slowly selling shares since 2015.
Amazon is among the world's highest-grossing online retailers, with $281 billion in net sales and approximately $365 billion in estimated physical and digital gross merchandise volume (GMV) in 2019. Online product and digital media sales accounted for 50% of net revenue in 2019.
Aug. 21 saw Amazon shares trading at $3,284.72 with a market cap of $1.65 trillion. The Peter Lynch chart shows that the company is trading above intrinsic value.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 1 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. Amazon's cash-to-debt ratio of 0.94 beats out 65.16% of the industry. The company saw increased levels of debt issued in 2019, but cash flows have continued to increase significantly in recent years.
Disclaimer: Author owns no stocks mentioned.
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