While working as a telephone repairman, Chou was introduced to the books written by Benjamin Graham, after which he started an investment club with several of his coworkers in 1981. In 1984, he left his old job for a position as a retail analyst at GW Asset Management, where he met Prem Watsa (Trades, Portfolio), the future Fairfax CEO. Chou turned the investment club into Chou Associates in 1986 and has been managing the funds ever since. His investment strategy is to "Buy bargains. Get the returns slowly. Think independently. Don't be afraid of what other people are saying," with a focus on balance sheet strength, cash flow, profitability, industry position, growth potential and management.
During the second quarter, Chou Associates sold out of its position in Sanofi SA (SNY, Financial) and reduced its holdings in Berkshire Hathaway Inc. Class A shares (BRK.A, Financial), DaVita Inc. (DVA, Financial), BlackBerry Ltd. (BB, Financial) and Bausch Health Companies Inc. (BHC, Financial).
The firm sold out of its remaining 20,000 shares of Sanofi, impacting the equity portfolio by -0.87%. Shares traded for an average price of $48.46 during the quarter.
Sanofi is a French multinational pharmaceutical company headquartered in Paris. It focuses primarily on seven major therapeutic areas: cardiovascular, central nervous system, diabetes, internal medicine, oncology, thrombosis and vaccines. It is one of the world's largest producers of vaccines.
On Aug. 24, shares of Sanofi traded around $51.52 for a market cap of $128.16 billion and a price-earnings ratio of 9.84. According to the Peter Lynch chart, the stock is undervalued based on second-quarter 2020 earnings.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 7 out of 10. The interest coverage ratio of 19.22 indicates the company can make its interest payments, though the Altman Z-Score of 1.73 indicates the company may face liquidity issues in the next two years. The company has a three-year revenue growth rate of 3.8% and a three-year earnings per share without non-recurring items growth rate of -12%.
Chou's firm sold 50 of its Berkshire Hathaway Class A shares, reducing the position by 33.33% for a remaining holding of 100 shares. The trade had a -13.61% impact on the equity portfolio. During the quarter, shares traded for an average price of $274,087.
Berkshire Hathaway is the conglomerate headed by famous value investor Warren Buffett (Trades, Portfolio) and his partner Charlie Munger (Trades, Portfolio). The group owns a wide variety of businesses, including Geico and other insurance companies, Berkshire Hathaway Energy, BNSF and a sizable investment portfolio.
On Aug. 24, Berkshire A shares traded around $318,880 for a market cap of $507.59 billion. The price to operating cash flow ratio stands at 13.14, which is around the middle of where it has been in the past few years.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.34 is lower than 85.23% of competitors, but the interest coverage ratio of 8.41 means the company can pay the interest on its debt. The return on equity of 5.64% is lower than the industry median of 7.8%, but the return on assets of 2.84% is higher than the industry median of 1.14%. However, it should be noted that while Berkshire reports as part of the insurance sector, not all of its businesses are insurance.
The firm reduced its holding in DaVita by 10,000 shares, or 30.54%, for a remaining investment of 22,743 shares. The trade had a -0.76% impact on the equity portfolio. Shares traded for an average price of $77.98 during the quarter.
DaVita is a health care company with a concentrated focus on kidney care. Based in Denver, the company provides outpatient kidney dialysis services primarily to patients in the U.S., though it does have some operations in other countries.
On Aug. 24, shares of DaVita traded around $87.57 for a market cap of $10.68 billion and a price-earnings ratio of 13.77. According to the Peter Lynch chart, the stock is undervalued based on recent earnings.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The Altman Z-Score of 1.49 indicates the company may face liquidity issues, but the current ratio of 1.35 indicates it can pay its short-term debts. The return on invested capital exceeds the weighted average cost of capital, indicating overall profitability on investments.
The firm sold 100,000 of its BlackBerry shares, reducing the holding by 18.9% for a remaining investment of 429,040 shares and impacting the equity portfolio by -0.41%. During the quarter, shares traded for an average price of $4.50.
The Canada-based enterprise software company was once famous for its smartphones, but it now primarily focuses on cybersecurity, communications software and internet of things (IoT) applications after losing its dominant position in the smartphone market.
On Aug. 24, shares of Blackberry traded around $4.79 for a market cap of $2.67 billion, a price-book ratio of 1.39 and a price-sales ratio of 2.89.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 2 out of 10. The cash-debt ratio of 1.32 is lower than the industry median of 2.14, while the Altman Z-Score of 0.34 indicates the company could be in danger of bankruptcy within the next two years. The three-year revenue growth rate of -11.7% stands in contrast to the three-year EPS without NRI growth rate of 48%.
Bausch Health Companies
Chou's firm also slimmed its position in Bausch Health Companies by 20,000 shares, or 1.28%, leaving a total investment of 1,538,992 shares and impacting the equity portfolio by -0.31%. Shares traded for an average price of $17.60 during the quarter.
Based in Laval, Canada, Bausch is a multinational specialty pharmaceutical company. It develops, manufactures and markets branded generic drugs and other pharmaceutical products with a focus on skin diseases, gastrointestinal disorders, eye health and neurology.
On Aug. 24, shares of Bausch traded around $16.95 for a market cap of $6.02 billion. The company had a loss per share of $5.08 in 2019, though Morningstar analysts expect results to be in the green for 2020.
GuruFocus gives the company a financial strength rating of 2 out of 10 and a profitability rating of 4 out of 10. The current ratio of 1.12 indicates the company can pay its short-term debts, but the Altman Z-Score of -0.02 shows that Bausch will likely need to raise additional liquidity to stay in business. The WACC is higher than the ROIC, indicating a loss on invested capital.
As of the end of the quarter, the firm holds 18 common stock positions valued at a total of $91 million. The top holdings are Bausch Health Companies with 29.86% of the equity portfolio, Berkshire A shares with 28.35% and Resolute Forest Products Inc. (RFP) with 10.23%.
In terms of sector weighting, the firm was most invested in financial services, followed by health care and basic materials.
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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