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Margaret Moran
Margaret Moran
Articles (382) 

Diamond Hill Capital's Top 5 3rd-Quarter Buys

Firm reveals new stakes focusing on real estate and heavy machinery

Diamond Hill Capital (Trades, Portfolio) recently disclosed its portfolio updates for the third quarter of 2020, which ended on Sept. 30.

Founded in 2000 and headquartered in Columbus, Ohio, Diamond Hill Capital (Trades, Portfolio) identifies itself as an independent investment management firm that seeks to align employee interests with investor interests by investing in the same portfolios. Its strategy is to maintain a long-term focus based on fundamental, ground-up analysis of a company's intrinsic value, as determined by factors such as market position, competition, management, valuation and growth prospects. The funds focus on buying undervalued companies that have a solid and proven foundation for revenue production.

Based on the above criteria, the firm's biggest new buys for the quarter were L3Harris Technologies Inc. (NYSE:LHX), Caterpillar Inc. (NYSE:CAT), Weyerhaeuser Co. (NYSE:WY), Dominion Energy Inc. (NYSE:D) and Deere & Co. (NYSE:DE).

L3Harris Technologies

The firm established a new holding of 1,024,507 shares in L3Harris Technologies, impacting the equity portfolio by 0.96%. Shares traded for an average price of $175.44 during the quarter.

L3Harris Technologies is a technology company, defense contractor and information technology services provider based in Melbourne, Florida. It is involved in a wide variety of other areas as well, including public safety, ocean exploration, weather forecasting and more.

On Nov. 10, shares of L3Harris traded around $189.08 for a market cap of $39.77 billion and a price-earnings ratio of 31.34. The GuruFocus Value chart rates the stock as modestly undervalued.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. Although the cash-debt ratio of 0.25 is lower than the industry median of 0.55, the Altman Z-Score of 2.29 suggests the company is financially stable. The company has been growing both its top and bottom lines with a three-year revenue growth rate of 5.6% and a three-year Ebitda growth rate of 3.8%.

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Caterpillar

The firm bought 1,085,298 shares of Caterpillar, impacting the equity portfolio by 0.89%. During the quarter, shares traded for an average price of $140.40.

Caterpillar is the world's largest designer and manufacturer of heavy construction equipment. Based in Deerfield, Illinois, its products are nearly synonymous with transportation infrastructure and building construction projects in the U.S.

On Nov. 10, shares of Caterpillar traded around $173.63 for a market cap of $94.01 billion and a price-earnings ratio of 28.78. The GuruFocus Value chart rates the stock as significantly overvalued.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.23 is lower than the industry median of 0.6, but the interest coverage ratio of 10.13 shows the company can keep up with its debt payments. The return on invested capital has averaged higher than the weighted average cost of capital over the past couple of years, indicating that the company is creating value.

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Weyerhaeuser

The firm established a new stake of 4,747,416 shares in Weyerhaeuser, impacting the equity portfolio by 0.75%. Shares traded for an average price of $27.41 during the quarter.

Headquartered in Seattle, Weyerhaeuser is a timberland real estate investment trust that owns 12.4 million acres of timberlands in the U.S. and manages 14.0 million acres under long-term licenses in Canada. It also produces wood products for the construction industry with a focus on sustainability.

On Nov. 10, shares of Weyerhaeuser traded around $27.66 for a market cap of $20.67 billion and a price-earnings ratio of 41.96. The GuruFocus Value chart rates the stock as fairly valued.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 6 out of 10. The interest coverage ratio of 2.91 is on the low end, but the Piotroski F-Score of 7 out of 9 indicates a healthy financial situation. The operating margin and net margin have declined in recent years to 10.31% and -1.16%, respectively.

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Dominion Energy

The firm bought 983,054 shares of Dominion Energy Inc., impacting the equity portfolio by 0.43%. During the quarter, shares traded for an average price of $78.62.

Based in Richmond, Virginia, Dominion is an energy company that supplies electricity and natural gas to several U.S. states primarily in the East and Northeast regions. The company made the news earlier this year when it sold nearly all of its natural gas transmission and storage business to Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A) (NYSE:BRK.B).

On Nov. 10, shares of Dominion traded around $85.44 for a market cap of $69.79 billion. The GuruFocus Value chart rates the stock as modestly overvalued.

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GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.01 and Altman Z-Score of 0.84 indicate the company will likely need to raise additional liquidity to avoid bankruptcy. Although the three-year revenue growth rate stands at 2.5%, the three-year Ebitda growth rate is -4.8%, indicating the company's profitability is shrinking.

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Deere & Co.

The firm established a new position of 332,737 shares in Deere & Co., impacting the equity portfolio by 0.41%. Shares traded for an average price of $192.83 during the quarter.

Operating under the brand name John Deere, Deere & Co. is a manufacturer of agricultural, construction and forestry machinery, as well as diesel engines, heavy equipment drivetrains and lawn care equipment. It has its headquarters in Moline, Illinois.

On Nov. 10, shares of Deere & Co. traded around $254.48 for a market cap of $79.7 billion and a price-earnings ratio of 29.65. The GuruFocus Value chart rates the stock as significantly overvalued.

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GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.18 is lower than the industry median of 0.6, but the Altman Z-Score of 2.36 indicates the company is not likely to face bankruptcy in the next two years. The ROIC is typically higher than the WACC, indicating overall profitability.

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Portfolio overview

Including the stocks mentioned above, the firm established eight new holdings during the quarter and also sold out of eight stocks, ending the quarter with 149 common stock holdings valued at a total of $18.13 billion.

As of the quarter's end, Diamond Hill Capital (Trades, Portfolio)'s top holdings were Abbott Laboratories (NYSE:ABT) with 3.36% of the equity portfolio, Berkshire Hathaway Inc. (NYSE:BRK.B) with 3.16% and American International Group Inc. (NYSE:AIG) with 3.01%. In terms of sector weighting, the firm was most invested in financial services, consumer cyclical and consumer defensive.

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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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