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Sydnee Gatewood
Sydnee Gatewood
Articles (2960) 

Ronald Muhlenkamp's Firm Buys NMI Holdings, MasTec

Guru's firm reveals 2nd-quarter portfolio

Muhlenkamp & Co. Inc., the investment firm founded by Ronald Muhlenkamp (Trades, Portfolio), released its portfolio for the second quarter last week.

While he is still acting as the firm's chairman, Muhlenkamp passed most operational responsibilities on to his sons last year. With the goal of maximizing returns through capital appreciation, as well as income from dividends and interest, his Wexford, Pennsylvania-based firm typically invests in highly profitable companies trading at a discount. When picking stocks, it seeks companies with strong balance sheets and high returns on equity. The firm believes that over time, stock prices reflect the companies' underlying value and that the long-term business of investing offers a higher chance of profitability and reliability.

In his quarterly letter to shareholders, Muhlenkamp said he expects the "uncertainty about the behavior of the [Covid-19] virus" and how to deal with it will continue for months. As such, he believes patience is an appropriate approach to the market currently. He noted that the firm sold its holdings of companies that will likely be most impaired by the ongoing pandemic, like airline stocks, while holding onto homebuilders, who he believes are "likely to do as well going forward as they have in the past."

Based on these considerations, the firm disclosed it entered only two new positions during the quarter: NMI Holdings Inc. (NASDAQ:NMIH) and MasTec Inc. (NYSE:MTZ). Other notable trades included the sale of the Annaly Capital Management Inc. (NYSE:NLY), Delta Air Lines Inc. (NYSE:DAL) and Cigna Corp. (NYSE:CI) holdings.

NMI Holdings

The firm invested in 322,516 shares of NMI Holdings, allocating 2.77% of the equity portfolio to the position. The stock traded for an average price of $14.16 per share during the quarter.

The Emeryville, California-based company, which provides private mortgage guaranty insurance through its subsidiaries, has a $1.4 billion market cap; its shares were trading around $16.55 on Monday with a price-earnings ratio of 6.44, a price-book ratio of 1.09 and a price-sales ratio of 2.69.

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

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GuruFocus rated NMI Holdings' financial strength 6 out of 10 on the back of comfortable interest coverage. The cash-debt ratio of 1.31, however, is underperforming in comparison to its industry and company history. The ratio between return on invested capital and weighted average cost of capital is also skewed in favor or ROIC, indicating the company gains more on an investment than it costs the company to raise the necessary funds for it.

The company's profitability did not fare as well, scoring a 4 out of 10 rating even though margins and returns outperform a majority of competitors. NMI also has a moderate Piotroski F-Score of 6, which indicates operations are stable. GuruFocus noted the company has recorded a slowdown in revenue per share growth over the past 12 months.

Of the gurus invested in NMI Holdings, PRIMECAP Management (Trades, Portfolio) has the largest stake with 5.30% of outstanding shares. Howard Marks (Trades, Portfolio)' Oaktree, Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also own the stock.

MasTec

Muhlenkamp's firm picked up 92,351 shares of MasTec, dedicating 2.22% of the equity portfolio to the holding. Shares traded for an average price of $37.81 each during the quarter.

The infrastructure engineering and construction company, which is headquartered in Coral Gables, Florida, has a market cap of $3.36 billion; its shares were trading around $45.84 on Monday with a price-earnings ratio of 10.64, a price-book ratio of 1.92 and a price-sales ratio of 0.51.

According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 7 out of 10 also supports this assessment.

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MasTec's financial strength was rated 5 out of 10 by GuruFocus. While the company has adequate interest coverage, the Altman Z-Score of 2.88 indicates it is under some pressure since its revenue per share has declined over the past year.

The company's profitability scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. MasTec also has a predictability rank of 2.5 out of five stars. GuruFocus says companies with this rank return an average of 7.3% annually over a 10-year period.

With 0.24% of outstanding shares, Royce is the company's largest guru shareholder. Other gurus invested in the stock are Louis Moore Bacon (Trades, Portfolio), Cohen, John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

Annaly Capital Management

With an impact of -3.12% on the equity portfolio, the firm divested of its 758,883 remaining shares of Annaly Capital Management. The stock traded for an average per-share price of $6.16 during the quarter.

Since the first quarter of 2014, GuruFocus estimates the firm has lost 31.74% on the investment.

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The New York-based company, which is one of the largest mortgage real estate investment trusts, has a $10.47 billion market cap; its shares were trading around $7.44 on Monday with a price-book ratio of 0.88.

Based on the median price-book chart, the stock appears to be trading slightly below its historical valuation.

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Weighed down by approximately $3.9 billion in new long-term debt, GuruFocus rated Annaly's financial strength 5 out of 10. The WACC also outperforms the ROIC, indicating there may be some profitability issues.

The REIT has a 3 out of 10 profitability rating. While the net margin is outperforming versus the industry, the company's returns are negative and underperform a majority of competitors. Annaly also has a moderate Piotroski F-Score of 6 as well as a one-star predictability rank. According to GuruFocus, companies with this rank return an average of 1.1% annually.

Simons' firm has the largest stake in Annaly with 0.53% of outstanding shares. Pioneer, Richard Snow (Trades, Portfolio), David Rolfe (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Greenblatt and Ken Fisher (Trades, Portfolio) also own the stock.

Delta Air Lines

The firm shed its 114,371 remaining shares of Delta, impacting the equity portfolio by -2.92%. During the quarter, the stock traded for an average price of $25.43 per share.

According to GuruFocus, Muhlenkamp's firm gained an estimated 27.33% on the investment, which was established in the fourth quarter of 2010.

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The airline, which is headquartered in Atlanta, has a market cap of $18.93 billion; its shares were trading around $29.59 on Monday with a price-book ratio of 2 and a price-sales ratio of 0.52.

The price chart shows the stock is trading below both its median price-book ratio and its median price-sales value.

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Delta's financial strength was rated 4 out of 10 by GuruFocus. While the cash-debt ratio of 0.51 indicates it is performing both versus its history and the industry, the low Altman Z-Score of 0.55 warns the company could be in danger of going bankrupt.

The airline's profitability fared better with a 7 out of 10 rating. Even though the operating margin is expanding, it and the company's returns are negative and underperform a majority of industry peers. Delta does have a moderate Piotroski F-Score of 4, but the one-star predictability rank is on watch as a result of declining revenue per share over the past year.

With a 3.72% stake, PRIMECAP is the company's largest guru shareholder. Pioneer, Stanley Druckenmiller (Trades, Portfolio), Cohen, Robert Olstein (Trades, Portfolio), Bernard Horn (Trades, Portfolio), Snow, Royce, Jeff Auxier (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also have positions in Delta.

Cigna

Impacting the equity portfolio by -2.78%, the firm dumped all 31,131 shares of Cigna. During the quarter, shares traded for an average price of $189.40 each.

GuruFocus data shows Muhlenkamp's firm gained around 3.97% on the investment, which was established in the first quarter of 2019.

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The Bloomfield, Connecticut-based health insurer has a $64.66 billion market cap; its shares were trading around $176.15 on Monday with a price-earnings ratio of 12.58, a price-book ratio of 1.38 and a price-sales ratio of 0.43.

According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 also leans toward undervaluation.

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GuruFocus rated Cigna's financial strength 5 out of 10. Although the company has issued approximately $18.3 billion in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The insurer may be becoming less efficient, however, since its assets are building up at a faster rate than revenue is growing.

The company's profitability scored a 7 out of 10 rating even though its margins and returns are underperforming over half of its competitors. Cigna is also being supported by a moderate Piotroski F-Score of 6 and a one-star predictability rank.

Of the gurus invested in Cigna, Dodge & Cox has the largest stake with 3.96% of outstanding shares. Other top guru shareholders include Andreas Halvorsen (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Pioneer, Barrow, Hanley, Mewhinney & Strauss, Leon Cooperman (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Chris Davis (Trades, Portfolio) and Charles Brandes (Trades, Portfolio).

Additional trades and portfolio performance

During the quarter, Muhlemkamp's firm also exited its positions in Celanese Corp. (NYSE:CE), Acuity Brands Inc. (NYSE:AYI), AutoZone Inc. (NYSE:AZO), the Invesco BuyBack Achievers Exchange-Traded Fund (NASDAQ:PKW) and Rush Enterprises Inc. (NASDAQ:RUSHB), as well as reduced or added to a slew of other holdings.

Around half of the firm's $187 million equity portfolio, which is composed of 31 stocks, is invested in the technology and health care sectors.

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According to the firm's website, the Muhlenkamp Fund returned 14.39% in 2019, underperforming the S&P 500's 31.49% return.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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