The Parnassus Endeavor Fund (Trades, Portfolio) released its third-quarter portfolio earlier this week, revealing potential value opportunities as the Covid-19 pandemic continues to impact the market.
The fund, which is part of Jerome Dodson (Trades, Portfolio)'s San Francisco-based Parnassus Investments, avoids investing in fossil fuel-related stocks. Rather, it prefers companies that have exemplary work environments and are known for being socially and environmentally responsible. With the goal of capital appreciation, the portfolio managers invest in discounted large-cap companies that have strong competitive advantages, relevant products and quality management teams.
With these criteria in mind, the fund established four new positions during the quarter, sold out of one holding and added to or trimmed a slew of other investments. Among its most notable trades were an increase in its Intel Corp. (INTC, Financial) stake, a new holding in Western Digital Corp. (WDC, Financial) and reductions of its Applied Materials Inc. (AMAT, Financial), Alaska Air Group Inc. (ALK, Financial) and Lam Research Corp. (LRCX, Financial) positions.
Intel
With an impact of 3.81% on the equity portfolio, the Endeavor Fund expanded its stake in Intel by 19,900%, picking up 1.9 million shares. The stock traded for an average price of $52.07 per share during the quarter.
It now holds 2 million shares total, which represent 3.83% of the equity portfolio. GuruFocus estimates Parnassus has gained 4.34% on the investment since establishing it in the second quarter of 2020.
The Santa Clara, California-based tech company, which manufactures semiconductors, has a $228.94 billion market cap; its shares were trading around $53.82 on Wednesday with a price-earnings ratio of 9.91, a price-book ratio of 2.79 and a price-sales ratio of 2.97.
The Peter Lynch charts shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 6 out of 10 also aligns with this assessment.
GuruFocus rated Intel's financial strength 7 out of 10 on the back of comfortable interest coverage and a high Altman Z-Score of 3.77 that indicates it is in good standing despite the fact assets are building up at a faster rate than revenue is growing. The return on invested capital is also well above the weighted average cost of capital, indicating it is turning a profit on its projects.
The company's profitability fared even better, scoring a 9 out of 10 rating. In addition to an expanding operating margin, Intel is supported by strong returns that outperform a majority of competitors as well as a high Piotroski F-Score of 7, which implies business conditions are healthy, and consistent earnings and revenue growth. It also has a predictability rank of four out of five stars. According to GuruFocus, companies with this rank typically return an average of 9.8% annually over a 10-year period.
Of the gurus invested in Intel, Ken Fisher (Trades, Portfolio) has the largest stake with 0.67% of outstanding shares. Other top guru shareholders include PRIMECAP Management (Trades, Portfolio), Chris Davis (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies and Michael Price (Trades, Portfolio).
Western Digital
Parnassus invested in 2.1 million shares of Western Digital, allocating 2.84% of the equity portfolio to the stake. Shares traded for an average price of $39.35 each during the quarter.
Headquartered in Santa Clara, California, the company, which manufactures hard-disk drives and other data storage solutions, has a market cap of $11.52 billion; its shares were trading around $37.85 on Wednesday with a price-book ratio of 1.2 and a price-sales ratio of 0.68.
According to the median price-sales chart, the stock is undervalued, an analysis which the GuruFocus valuation rank of 6 out of 10 aligns with.
Western Digital's financial strength was rated 4 out of 10 by GuruFocus. Weighed down by debt and poor interest coverage, the Altman Z-Score of 1.71 warns the company could be in danger of going bankrupt. In addition, the WACC eclipses the ROIC, suggesting it is struggling to turn a profit on its investments.
The company's profitability fared a bit better, scoring a 6 out of 10 rating. Even though its margins are declining, they still outperform over half of its industry peers. Its returns, however, are negative and are underperforming in comparison to other industry players. Western Digital also has a moderate Piotroski F-Score of 6, which indicates operations are stable, but the one-star predictability rank is on watch as a result of declining revenue per share over the past 12 months. GuruFocus says companies with this rank return an average of 1.1% annually.
The Endeavor Fund is now the company's largest guru shareholder with 0.69% of its outstanding shares. Simons' firm, PRIMECAP, the T Rowe Price Equity Income Fund (Trades, Portfolio), Pioneer, Robert Olstein (Trades, Portfolio), the FPA Capital Fund (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) also have positions in Western Digital.
Applied Materials
Impacting the equity portfolio by -3.06%, the fund trimmed its holding in Applied Materials by 24.53%, selling 1.3 million shares. During the quarter, the stock traded for an average per-share price of $61.75.
Parnassus now holds 4 million shares, which account for 8.8% of the equity portfolio. GuruFocus data shows the fund has gained an estimated 58.98% on the investment so far.
The Silicon Valley-based company, which supplies equipment, services and software for the production of semiconductor chips, has a $58.65 billion market cap; its shares were trading around $64.04 on Wednesday with a price-earnings ratio of 18.67, a price-book ratio of 6.12 and a price-sales ratio of 3.65.
Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 3 out of 10 also leans toward overvaluation since the share price is approaching a 10-year high.
GuruFocus rated Applied Materials' financial strength 7 out of 10, driven by adequate interest coverage and a robust Altman Z-Score of 6.64. The ROIC also surpasses the WACC, suggesting good profitability and value creation.
The company's profitability scored a 9 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of competitors, a high Piotroski F-Score of 9 and a one-star predictability rank.
Chris Davis (Trades, Portfolio) is the company's largest guru shareholder with a 1.78% stake. Other top guru investors include PRIMECAP, Al Gore (Trades, Portfolio), the T. Rowe Price Equity Income Fund, Fisher, David Carlson (Trades, Portfolio) and Pioneer.
Alaska Air
The Endeavor Fund curbed the Alaska Air position by 67.27%, selling 1.85 million shares. The transaction had an impact of -2.61% on the equity portfolio. During the quarter, the stock traded for an average price of $37.49 per share.
Parnassus Endeavor now holds 900,000 shares total, which make up 1.22% of the equity portfolio. GuruFocus estimates the fund has lost 37.14% on the investment since the second quarter of 2019.
The airline, which is headquartered in Seattle, has a market cap of $4.84 billion; its shares were trading around $38.83 on Wednesday with a price-earnings ratio of 90.95, a price-book ratio of 1.25 and a price-sales ratio of 0.73.
The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 6 out of 10, however, leans more toward undervaluation.
Alaska Air's financial strength was rated 5 out of 10 by GuruFocus. While the company has sufficient interest coverage, the Altman Z-Score of 1.17 warns it could be at risk of bankruptcy since assets are building up at a faster rate than revenue is growing and the WACC is higher than the ROIC.
The company's profitability scored an 8 out of 10 rating despite having margins and returns that underperform over half of its industry peers. Alaska Air is also supported by a moderate Piotroski F-Score of 6, but the three-star predictability rank is on watch as a result of declining revenue per share over the past year. GuruFocus data shows companies with this rank return, on average, 8.2% per year.
With a 4.44% stake, PRIMECAP is Alaska Air's largest guru shareholder. Diamond Hill Capital (Trades, Portfolio), the T. Rowe Price Equity Income Fund, Steven Cohen (Trades, Portfolio), Pioneer, Lee Ainslie (Trades, Portfolio), Greenblatt, Jones, Jeff Auxier (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss also have positions in the stock.
Lam Research
Parnassus reduced its Lam Research holding by 200,000 shares, or 40%. The transaction had an impact of -2.52% on the equity portfolio. Shares traded for an average price of $344.01 each during the quarter.
The fund now holds 300,000 shares total, accounting for 3.68% of the equity portfolio. According to GuruFocus, Parnassus has gained an estimated 73.7% on the investment so far.
The Fremont, California-based company, which manufactures semiconductor processing equipment, has a $54.2 billion market cap; its shares were trading around $373.63 on Wednesday with a price-earnings ratio of 24.68, a price-book ratio of 10.47 and a price-sales ratio of 5.54.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 2 out of 10 supports this assessment since the price-book and price-sales ratios are near 10-year highs.
GuruFocus rated Lam Research's financial strength 6 out of 10 on the back of comfortable interest coverage and a robust Altman Z-Score of 6.53. The ROIC also significantly outperforms the WACC, suggesting good value creation.
The company's profitability scored a 9 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors, a moderate Piotroski F-Score of 6 and a one-star predictability rank.
Of the gurus invested in Lam Research, Pioneer has the largest stake with 1.13% of outstanding shares. Other top guru shareholders include Philippe Laffont (Trades, Portfolio), Fisher, Ainslie, Jeremy Grantham (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).
Additional trades and portfolio performance
During the quarter, the Endeavor Fund also established positions in Illumina Inc. (ILMN, Financial), First American Financial Corp. (FAF, Financial) and Herman Miller Inc. (MLHR, Financial) as well as divested of its International Business Machines Corp. (IBM, Financial) holding.
Around 40% of Parnassus' $2.7 billion equity portfolio, which is composed of 30 stocks, is invested in the technology sector, followed by smaller positions in the financial services (26.03%) and industrials (16.87%) spaces.
According to its website, the Endeavor Fund posted a return of 33.29% in 2019, topping the S&P 500 Index's 31.49% return.
Disclosure: No positions.
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