Oaktree Capital Management recently disclosed its portfolio updates for the third quarter of 2020, which ended on Sept. 30.
Founded by Howard Marks (Trades, Portfolio) and several fellow investors in 1995, Oaktree Capital Management is a global investing firm that specializes in alternative and credit strategies. The Los Angeles-based firm now has over 39 portfolio managers and 950 employees in offices around the globe. Marks serves as co-chairman (along with Bruce Karsh) and chief financial officer. The firm's core investment philosophy has six tenets: risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing.
Based on the firm's investing criteria, its top sells for the quarter were Caesars Entertainment Corp. (CZR, Financial) and Taylor Morrison Home Corp. (TMHC, Financial), while its top buys were Montrose Environmental Group Inc. (MEG, Financial) and Uniti Group Inc. (UNIT, Financial).
Caesars Entertainment
The firm ended the quarter without its 15,250,000-share position in Caesars Entertainment after an unusual transaction in which the casino giant was acquired by Eldorado Resorts, but the merged company took on the Caesars name to form Caesars Entertainment Inc., which now trades under the CZR ticker. The trade had an impact of -5.04% on the equity portfolio. During the quarter, shares traded for an average price of $12.25.
The two companies completed their merger on July 20. According to the press release, "The transaction further enhances Caesars' position as the leading regional and destination gaming operator in the U.S. The combined company owns and operates more than 55 casino properties worldwide, including an iconic portfolio of eight casino hotel properties on the Las Vegas Strip." In the $17.3 billion deal, Eldorado paid approximately $12.30 per share of Caesars in a cash-and-stock transaction consisting of $8.70 in cash and the rest in shares.
On Nov. 19, shares of the new Caesars traded around $65.28 for a market cap of $13.60 billion. The GuruFocus Value chart rates the stock as significantly overvalued.
The company has a financial strength rating of 2 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.04 and Altman Z-Score of 0.37 show that the company is in a very precarious financial position and will likely need to raise additional liquidity to avoid bankruptcy. The weighted average cost of capital has surpassed the return on invested capital in recent quarters, suggesting the company is not currently profitable.
Taylor Morrison Home
The firm sold out of its 6,433,140-share stake in Taylor Morrison Home, impacting the equity portfolio by -3.38%. Shares traded for an average price of $23.56 during the quarter.
Taylor Morrison is a major U.S. homebuilder headquartered in Scottsdale, Arizona. Formed from the merger of Taylor Woodrow and Morrison Homes in 2007, the company has been rated "America's most trusted home builder" for the past five years by Lifestory Research's consumer trust study.
On Nov. 19, shares of Taylor Morrison traded around $25.24 for a market cap of $3.26 billion. The GuruFocus Value chart rates the stock as fairly valued.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.17 is lower than 76% of competitors, while the Altman Z-Score of 2.33 indicates that the company is not likely in danger of bankruptcy. The ROIC surpassed the WACC in the most recent quarter, indicating profitability for shareholders.
Montrose Environmental Group
The firm established a new holding of 4,322,644 shares in Montrose Environmental Group, impacting the equity portfolio by 2.80%. During the quarter, shares traded for an average price of $25.48.
Based in Irvine, California, Montrose is an environmental services company that provides measurement and analytical services as well as environmental resiliency and sustainability solutions to companies in a wide variety of industries.
On Nov. 19, shares of Montrose traded around $34.67 for a market cap of $865.43 million. The stock price has increased 130% since its initial public offering on July 23.
The company has a financial strength rating of 2 out of 10 and a profitability rating of 1 out of 10. These numbers are largely due to a lack of available data, though the cash-debt ratio of 0.22 and operating margin of -7.46% are signs that the company is not yet profitable.
Marks' firm is the most significant guru shareholder of the stock with 17.32% of shares outstanding, followed by Ron Baron (Trades, Portfolio) with 2.20%.
Uniti Group
The firm also invested in 4,474,624 shares of Uniti Group Inc., which had a 1.28% impact on the equity portfolio. Shares traded for an average price of $9.68 during the quarter.
Uniti is a real estate investment trust involved in the acquisition and construction of mission critical communications infrastructure, particularly wireless infrastructure.
On Nov. 19, shares of Uniti traded around $10.54 for a market cap of $2.45 billion. The GuruFocus Value chart rates the stock as fairly valued.
The REIT has a financial strength rating of 2 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 0.04 and Altman Z-Score of -0.77 indicate the company could face liquidity issues in the near future. The three-year revenue growth rate is 3.8%, while the three-year Ebitda growth rate is 0.4%.
Marks is the top guru shareholder of the company with 1.92% of shares outstanding, followed by Jim Simons (Trades, Portfolio)' Renaissance Technologies with 0.30% and Pioneer Investments (Trades, Portfolio) with 0.28%.
Portfolio overview
At the end of the quarter, Oaktree Capital Management held 73 common stock positions valued at a total of $3.68 billion. The firm established nine new holdings, sold out of 11 stocks and added to or reduced several other positions for a turnover of 9%.
The top holdings as of the quarter's end were Vistra Energy Corp. (VST) with 15.52 % of the equity portfolio, TORM PLC (TRMD) with 9.82% and Ally Financial Inc. (ALLY) with 9.75%. In terms of sector weighting, the firm was most invested in utilities, financial services and technology.
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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