Donald Smith & Co. (Trades, Portfolio) has released its portfolio for the third quarter. The firm, originally purchased and renamed by the late Donald Smith in 1983, has revealed major reductions in gold and top holdings, including Gold Fields Ltd. (GFI, Financial), Air France-KLM (AFLYY, Financial), Taylor Morrison Home Corp. (TMHC, Financial), Iamgold Corp. (IAG, Financial) and Atlas Air Worldwide Holdings Inc. (AAWW, Financial).
The firm takes a strict bottom-up approach to investing. It seeks to invest in stocks that are out of favor and are selling at discounts to tangible book value. Ideal companies for the firm are trading at very low price-to-tangible book ratios and offer a positive outlook for earnings potential over the next two to four years.
At the end of the quarter, the portfolio contained 65 stocks, with four new holdings. The new holdings include Greenbrier Companies Inc. (GBX, Financial), Argonaut Gold Inc. (ARNGF, Financial), PG&E Corp. (PCG, Financial) and the iShares Trust Exchange-Traded Fund (IWM, Financial). It is valued at $1.92 billion and has seen a turnover rate of 5%.
By weight, the top three sectors represented are basic materials (27.26%), industrials (24.75%) and financial services (21.20%).
The biggest impact to the portfolio came from the reduction of Gold Fields by 9.38 million shares. This reduced the position by 55.62%. The shares traded at an average price of $12.25 each during the quarter. Overall, the sale had an impact of -4.34% on the portfolio and GuruFocus estimates the total gain on the holding at 107.71%.
Gold Fields is a globally diversified gold miner and producer with eight operating mines in Australia, Ghana, Peru and South Africa. The majority of group revenue is generated in the Australian mines, largely the St. Ives and Granny Smith sites, with Ghana the second- largest contributor of revenue. The company is involved in underground and surface gold and copper mining and related activities, including exploration, development, extraction, processing and smelting. In Peru, the company also produces copper, and it has other precious metal exploration interests in Africa, Eurasia, Australasia and the Americas.
On Nov. 6, the stock was trading at $12.82 per share with a market cap of $10.81 billion. The GF Value Line shows that the company is currently trading at a significantly overvalued level.
GuruFocus gives the company a financial strength rating 5 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 1 out of 10. The current cash-to-debt ratio of 0.43 places the company lower than 75.18% of industry competitors. The company's weighted average cost of capital significantly outweighs the return on invested capital, which indicates it will destroy value as it grows.
The firm also reduced its position in Air France-KLM by 6.10 million shares. This was a 37.34% reduction in the holding and shares traded at an average price of $4.40 during the quarter. The sale represented a -1.37% impact on the portfolio and GuruFocus estimates the total loss of the holding at 18.72% during the 10-year holding period.
Air France-KLM focuses on intercontinental air transportation. The company reaches hundreds of destinations in various regions of the world. Additionally, it has established partnerships with other airlines to better assist customers during travel arrangements. Air passenger transportation includes fees for excess baggage, paid memberships by customers and airport services supplied to third-party airlines. France accounts for the most revenue of any country and makes up roughly one-third of the total sales.
Nov. 6 saw the stock trading at $3.62 with a market cap of $1.55 billion. The GF Value Line warns the stock is a possible value trap, so investors should think twice before buying shares.
GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 4 out of 10 and a valuation rank of 6 out of 10. There are currently five severe warning signs issued, including new long-term debt and poor financial strength. The Altman-Z Score of -0.25 places the company in the distress column with bankruptcy a possibility in the next two years. Negative operating margin and net margin percentages contribute to the low profitability rank.
Taylor Morrison Home
The firm's second-largest holding saw 1.01 million shares sold during the quarter. This reduced the position in the holding by 15.07%. During the quarter, shares traded at an average price of $23.56. The portfolio was impacted by -0.96% and GuruFocus estimates the total gain of the holding at 2.49%.
Taylor Morrison Home is an American residential construction company that builds single-family homes and communities throughout California, Arizona, Texas, Illinois, Colorado, Florida, Georgia and North Carolina. Taylor Morrison also reports via a mortgage operations segment that provides financing services for its homebuyers. It constructs various types of single-family homes, from entry-level to luxury move-up homes, as well as active adult communities.
On Nov. 6, the stock was trading at $24.54 per share with a market cap of $3.19 billion. The Peter Lynch chart suggests the stock has traded close to intrinsic value for the majority of the last eight years.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rank of 7 out of 10. There are currently two severe warning signs issued for declining gross margin and operating margin percentages. The last two years have seen higher-than-average levels of debt for the company, which has driven down its financial strength rating.
Representing the largest position in the portfolio, the Iamgold position was cut by 4.87 million shares during the third quarter. The sale represented an 11.62% reduction in the holding and shares traded at an average price of $4.33 during the quarter. GuruFocus estimates the total gain on the holding at 8.68%.
Iamgold is a mid-tier mining company with three gold mines on three continents. A solid base of strategic assets in North and South America and West Africa is complemented by development and exploration projects, and continued assessment of accretive acquisition opportunities.
The stock traded at $3.84 per share on Nov. 6, with a market cap of $1.81 billion. The Peter Lynch chart shows that the stock was trading well above its intrinsic value in 2018.
GuruFocus gives the stock a financial strength rating of 6 out of 10 and a profitability rank of 4 out of 10. There are currently three severe warning signs issued for declining revenue per share, an Altman Z-Score of 0.96, placing the company in the distress column, and a Beneish M-Score indicating the company might have manipulated financial results. Cash flows have been inconsistent over the last decade, frequently dipping into negative numbers.
Atlas Air Worldwide Holdings
The firm also reduced its holding of Atlas Air Worldwide Holdings by 26.10% with the sale of 409,721 shares. The shares traded at an average price of $54.74 during the quarter and GuruFocus estimates the firm has gained 86.19% during the lifetime of the holding.
Atlas Air Worldwide Holdings, together with its subsidiaries, is a leading global provider of outsourced aircraft and aviation operating services. The company owns a fleet of freighters and passenger aircraft and leases additional aircraft and engines to expand its portfolio. It gives customers access to new production aircraft and offers crew, maintenance and insurance services. In addition, the company operates a charter division to provide air cargo and passenger aircraft charters.
On Nov. 6, the stock was trading at $60.60 per share with a market cap of $1.58 billion. The GF Value Line shows the stock is currently trading at a fair value rating.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 7 out of 10. There are currently three severe warning signs issued for new long-term debt, declining operating margin percentage and an Altman Z-Score of 0.95, placing the company in the distress column. Debt levels have increased steadily over the last decade.
Disclosure: Author owns no stocks mentioned.
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