Ariel Investments recently disclosed its portfolio updates for the third quarter of 2020, which ended on Sept. 30.
The Chicago-based firm primarily invests in undervalued small and mid-cap companies that demonstrate sustainable competitive advantages, high barriers to entry, predictable fundamentals, low risk and the potential for double-digit earnings growth. John Rogers (Trades, Portfolio) is the chairman, co-CEO and chief investment officer of the firm. Rogers holds that a patient, long-term, independent and forward-looking approach is essential for generating good returns.
Based on its investing criteria, the firm's top buys for the quarter were Gilead Sciences Inc. (GILD, Financial) and Madison Square Garden Entertainment Corp. (MSGE, Financial), while its top sells were ViacomCBS Inc. (VIAC, Financial) and KKR & Co. Inc. (KKR, Financial).
Gilead Sciences
The firm increased its Gilead Sciences investment by 751,198 shares, or 40.55%, for a total holding of 2,603,713 shares. The trade had a 0.69% on the equity portfolio. During the quarter, shares traded for an average price of $69.40.
Headquartered in Foster City, California, Gilead Sciences is a biopharmaceutical giant that develops, manufactures and commercializes innovative drugs in a variety of health care fields with a focus on HIV/AIDS, liver diseases, hematology, oncology, respiratory diseases and cardiovascular conditions.
On Nov. 23, shares of Gilead traded around $59.74 for a market cap of $74.74 billion. The GuruFocus Value chart rates the stock as modestly undervalued.
The company has a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.82 is near the industry median of 0.91, while the Altman Z-Score of 2.31 indicates mild to moderate financial distress. The return on invested capital is higher than the weighted average cost of capital, indicating overall profitability.
Madison Square Garden Entertainment
The firm also upped its stake in Madison Square Garden Entertainment by 517,319 shares, or 47.89%, for a total holding of 1,597,626 shares. The trade had a 0.51% impact on the equity portfolio. Shares traded for an average price of $72.23 during the quarter.
Madison Square Garden Entertainment is an owner and operator of entertainment venues, including Madison Square Garden, Hulu Theatre, Radio City Music Hall, Beacon Theatre and Chicago Theatre, as well as new venues in London and Las Vegas.
On Nov. 23, shares of Madison Square Garden Entertainment traded around $79.55 for a market cap of $1.92 billion. Since the spinoff, shares are down approximately 10%.
The company has a financial strength rating of 5 out of 10 and a profitability rating of 1 out of 10. The cash-debt ratio of 3.86 is higher than 68% of competitors, while the current ratio of 2.61% indicates the company can pay its short-term debts comfortably. All this cash will be needed, as the operating margin is at -38.92%.
ViacomCBS
The firm reduced its ViacomCBS holding by 1,980,517 shares, or 32.72%, for a remaining investment of 4,073,054 shares. The trade had a -0.70% impact on the equity portfolio. During the quarter, shares traded for an average price of $26.76.
Viacom was originally a 2006 spinoff from CBS, but the companies re-merged in late 2019. The New York City-based multinational mass media conglomerate owns mainly film and TV assets, including live sports, news, classic shows such as Star Trek and TV networks such as Nickelodeon.
On Nov. 23, shares of ViacomCBS traded around $34.91 for a market cap of $21.61 billion. The GuruFocus Value chart rates the stock as modestly overvalued.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.14 is lower than 81% of competitors, while the Altman Z-Score of 1.44 indicates the company may face bankruptcy risk in the next two years. The operating margin of 16.18% and net margin of 11.89% have been around the same levels in recent years and surpass the industry medians of 2.67% and -1.78%, respectively.
KKR
The firm cut its KKR. investment by 1,088,713 shares, or 23.4%, for a remaining stake of 3,564,315 shares. The trade had a -0.51% impact on the equity portfolio. Shares traded for an average price of $34.93 during the quarter.
KKR is a U.S. global investment company that deals with multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit. It operates through a network of strategic partners and focuses on fundamentals and long-term capital appreciation.
On Nov. 23, shares of KKR traded around $38.61 for a market cap of $21.98 billion. The GuruFocus Value chart rates the stock as significantly overvalued.
The company has a financial strength rating of 3 out of 10 and a profitability rating of 5 out of 10. The interest coverage ratio of 0.79 and Altman Z-Score of 0.68 indicate the company will likely need to raise additional liquidity in order to avoid bankruptcy. The WACC surpasses the ROIC, indicating the company is not creating value for holders of the common stock shares.
Portfolio overview
As of the quarter's end, the firm held 142 common stock positions valued at a total of $6.89 billion. The firm added four new positions, sold out of nine stocks and added to or reduced several other positions for a turnover of 7%.
The top holdings were Baidu Inc. (BIDU, Financial) with 5.24% of the equity portfolio, Philip Morris International Inc. (PM, Financial) with 4.97% and Microsoft Corp. (MSFT, Financial) with 4.81%. In terms of sector weighting, the firm was most invested in financial services and communication services, followed by industrials and health care.
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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