Hillman Capital Management, founded by Mark Hillman (Trades, Portfolio) in 1998, has reported its portfolio for the third quarter of 2020. The firm added several new companies to the portfolio and sold out of holdings in Amazon.com Inc. AMZN, Stericycle Inc. SRCL and McDonald's Corp. MCD.
The firm seeks to invest in companies with distinct competitive advantages that have temporarily fallen out of favor for non-recurring or short-term reasons. Ideal companies will have value that is not well known or fully recognized by the public. Cash flow, dividends, sales, earnings, book value and projected growth rates are all considered when determining value by the firm.
Portfolio overview
At the end of the quarter, the portfolio contained 36 stocks, with two new holdings in Cisco Systems Inc. CSCO and General Dynamics Corp. GD. The portfolio is valued at $142 million and has seen a turnover rate of 16%.
Top holdings include Microsoft Corp. MSFT, Intel Corp. INTC, Compass Minerals International Inc. CMP, Biogen Inc. BIIB and DuPont de Nemours Inc. DD.
By weight, the top three sectors represented are health care (20.27%), industrials (11.95%) and financial services (11.56%).
Amazon
During the quarter, the holding in Amazon was sold out entirely. After the holding was established in the fourth quarter of 2019, it was sold consistently by the firm over each quarter during 2020. The stock traded at an average price of $3,151.21 during the three months ended Sept. 30. Overall, the 2,667-share sale represented a -5.36% impact on the portfolio and GuruFocus estimates the total estimated gain on the holding at 75.90%.
Amazon is among the world's highest-grossing online retailers, with $281 billion in net sales and approximately $365 billion in estimated physical and digital gross merchandise volume (GMV) in 2019. Online product and digital media sales accounted for 50% of net revenue in 2019, followed by commissions, related fulfillment and shipping fees and other third-party seller services.
On Nov. 10, the stock was trading at $3,029.52 per share with a market cap of $1.53 trillion. The GF Value line shows that the company is trading at a modestly overvalued level.
GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 2 out of 10. There is one severe warning sign issued for assets growing faster than revenue. The return on invested capital outweighs the weighted average cost of capital, which indicates the company is creating value as it grows.
Stericycle
Another holding that was sold during the quarter was Stericycle. The shares traded at an average price of $61.34 during the quarter. Overall, the 86,845-share sale had a -3.54% impact on the portfolio and GuruFocus estimates the total gain of the holding at 3.28%.
Stericycle is the largest medical waste management service provider in North America, eclipsing all other competitors in size and scope of its operations. While Stericycle has one publicly traded competitor about 1/60 its size, the industry is dominated by privately owned local companies. Through over 500 acquisitions, Stericycle has been a driving force in the consolidation of the medical waste management industry. Its customers range from physician offices to large hospitals, which cover over 1 million locations.
As of Nov. 10, the stock was trading at $73.19 per share with a market cap of $6.70 billion. According to the GF Value line, the stock is trading at a significantly overvalued level.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 7 out of 10. There are currently four severe warning signs issued for declining revenue per share, assets growing faster than revenue and declining operating and gross margin percentages. The current cash-to-debt ratio of 0.03 has come due to high levels of debt over the last three years and ranks the company lower than 91.28% of competitors.
Cisco Systems
Cisco Systems was established as a new holding for the first time since it was sold out in the fourth quarter of 2019. The holding was re-established with the purchase of 97,207 shares. During the quarter, the stock traded for an average price of $43.58. The purchase had an impact of 2.59% on the portfolio and GuruFocus estimates the total gain on the holding at 3.90%.
Cisco Systems is the world's largest hardware and software supplier within the networking solutions sector. The company's wide array of hardware is complemented with solutions for software-defined networking, analytics and intent-based networking. In collaboration with Cisco's initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.
Nov. 10 saw the stock trading at $38.91 per share with a market cap of $164.32 billion. The GF Value line shows that the company is trading at a modestly undervalued level.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 5 out of 10. The strong profitability rank has been propped up by operating and net margin percentages that outdo at least 95% of competitors. Cash flows have increased steadily over the years.
General Dynamics
The second new buy during the quarter saw General Dynamics added to the portfolio for the first time. The holding was established with 24,114 shares. The stock traded at an average price of $147.72 during the quarter. Overall, the purchase had a 2.35% impact on portfolio and GuruFocus estimates the total gain of the holding at 2.82% since it was established.
General Dynamics is a long-cycle defense contractor and business jet manufacturer. The company's segments include aerospace, combat systems, marine, information technology and mission systems. The company's aerospace segment creates Gulfstream business jets. The combat systems division mostly produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The information technology business primarily serves the government market. The mission systems segment focuses on products that provide command, control, computers, intelligence, surveillance and reconnaissance capabilities to the military.
On Nov. 10, the stock was trading at $151.54 per share with a market cap of $43.47 billion. The GF Value line shows the stock is trading at a modestly undervalued level.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 6 out of 10. There are currently three severe warning signs issued for assets growing faster than revenue and declining operating and gross margin percentages. Recent increases in long-term debt have dropped the cash-to-debt ratio to 0.1. The operating and net margin percentages work alongside the strong return on equity to build up the stock's profitability rank.
McDonald's
McDonald's was also cut from the portfolio and rounded out the top five biggest impacts on the portfolio. The 16,830 shares that made up the holding traded for an average price of $205.07 during the quarter. The sale had an overall impact of -2.26% and GuruFocus estimates the total gain at 3.47% since the holding was established in the fourth quarter of 2019.
McDonald's generates revenue through company-owned restaurants, franchise royalties and licensing pacts. Restaurants offer a uniform value-priced menu with some regional variations. As of June 2020, there were roughly 39,000 locations in more than 120 countries.
As of Nov. 10, the stock was trading at $212.56 with a market cap of $159.07 billion. The GF Value line rates the stock at modestly overvalued.
GuruFocus gives the stock a financial strength rating of 3 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 1 out of 10. There are currently two severe warning signs issued for declining revenue per share and poor financial strength. Revenue has decreased over the last seven years as net income has seen small increases.
Disclosure: Author owns no stocks mentioned.
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