Bernard Horn's Top 5 Buys of the 3rd Quarter

Guru's largest new holding is in fashion company Tapestry

Dec 03, 2020

Polaris Capital Management leader Bernard Horn (Trades, Portfolio) released his third-quarter portfolio earlier this week.

Seeking to generate strong risk-adjusted returns and capital appreciation, the guru's Boston-based firm invests in discounted but high-quality stocks in developed as well as emerging markets.

Keeping these criteria in mind, Horn's firm entered five new positions during the quarter, which were Tapestry Inc. (TPR, Financial), Ingredion Inc. (INGR, Financial), Intel Corp. (INTC, Financial), Alexion Pharmaceuticals Inc. (ALXN, Financial) and Science Applications International Corp. (SAIC, Financial). It also sold out of seven stocks and added to or reduced a number of other existing holdings.

Tapestry

Polaris invested in316,900 shares of Tapestry, allocating 1.33% of the equity portfolio to the holding. The stock traded for an average price of $14.69 per share during the quarter.

The New York-based fashion house, which owns the Coach, Kate Spade and Stuart Weitzman brands, has a $7.9 billion market cap; its shares were trading around $28.48 on Thursday with a price-book ratio of 3.12 and a price-sales ratio of 1.65.

The median price-sales chart shows the stock is trading below its historical average, suggesting it is undervalued. The GuruFocus valuation rank of 6 out of 10 also supports this assessment even though the share price and price-sales ratio are approaching one-year highs.

GuruFocus rated Tapestry's financial strength 4 out of 10 on the back of weak interest coverage. The low Altman Z-Score of 1.29 warns the company could be at risk of going bankrupt if it does not improve its liquidity position. Assets are also building up faster than revenue is growing, which indicates it may be becoming less efficient, while the weighted average cost of capital significantly surpasses the return on invested capital, indicating struggles with profitability.

The company's profitability fared better, scoring a 7 out of 10 rating despite having margins and returns that underperform over half of its competitors. Tapestry also has a Piotroski F-Score of 4, which indicates operations are stable, but the predictability rank of one out of five stars is on watch as a result of revenue per share declining over the past 12 months. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Tapestry, John Rogers (Trades, Portfolio) has the largest stake with 0.59% of outstanding shares. Other top guru shareholders include Ken Heebner (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Charles de Vaulx (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Hotchkis & Wiley and Richard Snow (Trades, Portfolio).

Ingredion

The firm picked up 59,100 shares of Ingredion, dedicating 1.2% of the equity portfolio to the position. Shares traded for an average price of $81.26 each during the quarter.

Headquartered in Westchester, Illinois, the food company, which produces sweeteners, starches, nutrition ingredients and biomaterials, has a market cap of $5.19 billion; its shares were trading around $77.52 on Thursday with a price-earnings ratio of 15.32, a price-book ratio of 1.87 and a price-sales ratio of 0.88.

According to the Peter Lynch chart, the stock is slightly overvalued. The GuruFocus valuation rank of 7 out of 10, however, leans more toward undervaluation.

Ingredion's financial strength was rated 5 out of 10 by GuruFocus. Although the company has issued approximately $317 million in new long-term debt over the past three years, it is still at a manageable level due to adequate interest coverage. The high Altman Z-Score of 3.19 also indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, indicating good value creation.

The company's profitability scored a 7 out of 10 rating, driven by an expanding operating margin, returns that outperform over half of its industry peers and a moderate Piotroski F-Score of 4. The two-star predictability rank, however, is on watch as a result of revenue per share declining over the past year. GuruFocus says companies with this rank return, on average, 6% annually.

With a 1.33% stake, Yacktman Asset Management (Trades, Portfolio) is Ingredion's largest guru shareholder. Charles Brandes (Trades, Portfolio), David Einhorn (Trades, Portfolio), Pioneer, Mario Gabelli (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Royce, Richard Pzena (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also have positions in the stock.

Intel

Horn's firm entered an86,900-share holding in Intel, giving it 1.2% space in the equity portfolio. The stock traded for an average per-share price of $52.07 during the quarter.

The Santa Clara, California-based tech company, which manufactures computer components like microprocessors and chipsets, has a $206.66 billion market cap; its shares were trading around $50.43 on Thursday with a price-earnings ratio of 9.88, a price-book ratio of 2.77 and a price-sales ratio of 2.77.

Based on the Peter Lynch chart, the stock appears to be undervalued.

Driven by a comfortable level of interest coverage, GuruFocus rated Intel's financial strength 6 out of 10. The Altman Z-Score of 3.49 also indicates the company is in good standing despite seeing its assets build up at a faster rate than revenue is growing. The ROIC is also higher than the WACC, indicating good value creation.

The company's profitability fared even better with a 9 out of 10 rating. In addition to an expanding operating margin, Intel is being supported by strong returns that outperform a majority of competitors and a high Piotroski F-Score of 7, which indicates business conditions are healthy. Consistent earnings and revenue growth contributed to a 4.5-star predictability rank. GuruFocus data shows companies with this rank return, on average, 10.6% annually.

Ken Fisher (Trades, Portfolio) is Intel's largest guru shareholder with a 0.69% stake. PRIMECAP Management (Trades, Portfolio), Chris Davis (Trades, Portfolio), Pioneer, Jim Simons (Trades, Portfolio)' Renaissance Technologies, Micheal Price and the Parnassus Endeavor Fund (Trades, Portfolio) also have large positions in the stock.

Alexion Pharmaceuticals

Polaris purchased 37,800 shares of Alexion Pharmaceuticals, expanding the equity portfolio by 1.16%. During the quarter, the stock traded for an average price of $108.03 per share.

The pharmaceutical company headquartered in Boston, which is best known for Soliris, a drug used to treat atypical hemolytic uremic syndrome and paroxysmal nocturnal hemoglobinuria, has a market cap of $26.35 billion; its shares were trading around $120.47 on Thursday with a price-earnings ratio of 28.13, a price-book ratio of 2.38 and a price-sales ratio of 4.56.

The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 10 out of 10, however, leans heavily toward undervaluation even though the share price and price-sales ratio are nearing one-year highs.

Alexion's financial strength was rated 7 out of 10 by GuruFocus. In addition to sufficient interest coverage, the company has a robust Altman Z-Score of 3.58 even though assets are building up at a faster rate than revenue is growing. It is also cresting good value since the ROIC eclipses the WACC.

The company's profitability fared even better, scoring a 9 out of 10 rating on the back of an expanding operating margin, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. Consistent earnings and revenue growth also contributed to Alexion's three-star predictability rank. GuruFocus data indicates companies with this rank typically return an average of 8.2% annually.

Of the gurus invested in Alexion, Simons' firm has the largest stake with 2.17% of outstanding shares. Steven Cohen (Trades, Portfolio), Pioneer, David Carlson (Trades, Portfolio), Jones, Greenblatt, Fisher, Lee Ainslie (Trades, Portfolio) and Pzena also own the stock.

Science Applications International

The firm bought 47,954 shares of Science Applications International, dedicating 1.01% of the equity portfolio to the holding. Shares traded for an average price of $78.79 each during the quarter.

The Reston, Virginia-based information technology company, which also provides government services, has a market cap of $5.53 billion; its shares were trading around $95.06 on Thursday with a price-earnings ratio of 27.63, a price-book ratio of 3.84and a price-sales ratio of 0.83.

According to the Peter Lynch chart, the stock is overvalued.

GuruFocus rated Science Applications' financial strength 4 out of 10 on the back of low interest coverage and an Altman Z-Score of 2.19 that suggests it is under some pressure since assets are building up at a faster rate than revenue is growing. The ROIC, however, is higher than the WACC, indicating good value creation.

The company's profitability scored a 7 out of 10 rating, driven by an expanding operating margin as well as returns that outperform over half of its competitors. It also has a moderate Piotroski F-Score of 4 and, as a result of steady earnings and revenue growth, a 2.5-star predictability rank. According to GuruFocus data, companies with this rank return an average of 7.3% annually.

With a 0.76% stake, Murray Stahl (Trades, Portfolio) is Science Applications' largest guru shareholder. PRIMECAP, First Pacific Advisors (Trades, Portfolio), the FPA Capital Fund (Trades, Portfolio), Pioneer and Greenblatt also own the stock.

Additional trades and portfolio performance

During the quarter, Horn's firm also divested of its positions in L Brands Inc. (LB, Financial), Darden Restaurants Inc. (DRI, Financial) and Dometic Group AB (OSTO:DOM, Financial) as well as added to its SK Hynix Inc. (XKRX:000660) holding and curbed its Imerys (XPAR:NK) investment.

Polaris' $374 million equity portfolio, which is composed of 98 stocks, is most heavily invested in the financial services sector with a weight of 21.83%, followed by a smaller representation in the consumer cyclical and basic materials spaces.

GuruFocus data shows the firm returned 22.8% in 2019, underperforming the S&P 500's return of 31.48%.

Disclosure: No positions.