Michael Price's Top 5 Trades of the 3rd Quarter

Guru boosts largest holding Intel

Dec 08, 2020

MFP Investors leader Michael Price (Trades, Portfolio) disclosed his firm's third-quarter portfolio last month.

The guru's New York-based hedge fund, which he founded in 1998, utilizes a value-based investing style to find out-of-favor small caps that trade at an attractive valuation. Price has been known to take an activist approach to his investments as well, seeking to improve profitability and unlock value.

Keeping these considerations in mind, the guru established 12 new positions during the quarter, sold out of four holdings and added to or trimmed a number of other existing investments. Among his most notable trades for the three months ended Sept. 30 were the divestment of Tiffany & Co. (TIF, Financial) and FMC Corp. (FMC, Financial), new positions in FirstEnergy Corp. (FE, Financial) and Kansas City Southern (KSU, Financial) and a boost to the Intel Corp. (INTC, Financial) stake.

Tiffany

With an impact of -1.69% on the equity portfolio, Price sold his remaining 76,000 shares of Tiffany. The stock traded for an average price of $121.51 per share during the quarter.

GuruFocus estimates the guru gained 6.11% on the investment, which was established in the fourth quarter of 2019.

The iconic New York-based jeweler, which is in the process of being acquired by LVMH (XPAR:MC, Financial), has a $15.94 billion market cap; its shares were trading around $131.27 on Tuesday with a price-earnings ratio of 55.39, a price-book ratio of 4.89 and a price-sales ratio of 4.36.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 1 out of 10 supports this assessment since the share price and the price-sales ratio are both approaching 10-year highs.

GuruFocus rated Tiffany's financial strength 6 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 4.25. Assets are building up at a faster rate than revenue is growing, however, indicating it may be becoming less efficient.

The company's profitability scored a 7 out of 10 rating. Even though its operating margin is in decline, Tiffany has strong returns that outperform over half of its competitors. It also has a moderate Piotroski F-Score of 4, implying business conditions are stable, but the predictability rank of 2.5 out of five stars is on watch due to declines in revenue per share over the past 12 months. According to GuruFocus, companies with this rank return an average of 7.3% annually over a 10-year period.

Of the gurus invested in Tiffany, John Paulson (Trades, Portfolio) has the largest holding with 0.49% of outstanding shares. Other guru shareholders who are counting on the pending merger are Pioneer Investments (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, George Soros (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Ron Baron (Trades, Portfolio).

FMC

Impacting the equity portfolio by -1.63%, the investor sold his 89,400 remaining shares of FMC. Shares traded for an average price of $106.95 each during the quarter.

GuruFocus data shows Price lost an estimated 4.29% on the investment, which was established in the first quarter of 2017.

The chemical manufacturer, which is headquartered in Philadelphia, has a market cap of $15.42 billion; its shares were trading around $118.83 on Tuesday with a price-earnings ratio of 31.09, a price-book ratio of 5.24 and a price-sales ratio of 3.29.

According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 3 out of 10 aligns with this assessment since the price-sales ratio and share price are both close to multiyear highs.

FMC's financial strength was rated 4 out of 10 by GuruFocus. Although the company has issued approximately $1.6 billion in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 3.01 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also eclipses the weighted average cost of capital, implying good value creation.

The company's profitability fared even better, scoring an 8 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers. FMC also has a high Piotroski F-Score of 7, which means business conditions are healthy, but the one-star predictability rank is on watch as a result of recording a loss in operating income over the past three years. GuruFocus says companies with this rank return an average of 1.1% annually.

With a 0.88% stake, Pioneer Investments is FMC's largest guru shareholder. Larry Robbins (Trades, Portfolio), Simons' firm, Steven Cohen (Trades, Portfolio), Gabelli, Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) also own the stock.

FirstEnergy

Price invested in 200,000 shares of FirstEnergy, allocating 1.04% of the equity portfolio to the position. The stock traded for an average per-share price of $31.47 during the quarter.

The Akron, Ohio-based utility company has a $15.99 billion market cap; its shares were trading around $29.55 on Tuesday with a price-earnings ratio of 21.99, a price-book ratio of 2.23 and a price-sales ratio of 1.47.

Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 4 out of 10 aligns with this assessment even though the share price and price ratios are all approaching multiyear lows.

GuruFocus rated FirstEnergy's financial strength 3 out of 10. Having issued approximately $2.8 billion in new long-term debt over the past three years, the company has poor interest coverage. The low Altman Z-Score of 0.52 also warns the company could be in danger of going bankrupt if it does not improve its liquidity position.

The company's profitability fared a bit better with a 6 out of 10 rating. While it is being supported by an expanding operating margin and strong return on equity, FirstEnergy's return on assets and return on capital both underperform a majority of competitors. It also has a moderate Piotroski F-Score of 5, but the one-star predictability rank is on watch as a result of operating income losses and declining revenue per share over the past several years.

Pioneer Investments is the company's largest guru shareholder with 0.11% of outstanding shares. Grantham, Bacon, Greenblatt, Soros, Gabelli, the Signature Select Canadian Fund (Trades, Portfolio), John Hussman (Trades, Portfolio), Private Capital (Trades, Portfolio), Jones and Cohen also own the stock.

Kansas City Southern

The guru picked up 29,500 shares of Kansas City Southern, dedicating 0.97% of the equity portfolio to the holding. During the quarter, the stock traded for an average price of $172.99 per share.

The transportation holding company headquartered in Kansas City, Missouri, which has railroad investments in the U.S., Mexico and Panama, has a market cap of $18.36 billion; its shares were trading around $196.19 on Tuesday with a price-earnings ratio of 32.42, a price-book ratio of 4.12 and a price-sales ratio of 7.06.

The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 agrees with this analysis since the share price and price-book and price-sales ratios are closing in on 10-year highs.

Kansas City Southern's financial strength was rated 5 out of 10 by GuruFocus on the back of adequate interest coverage and a high Altman Z-Score of 3.08. The ROIC also surpasses the WACC, indicating good value creation.

The company's profitability scored an 8 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. Although Kansas City Southern has recorded a slowdown in revenue per share growth over the past year, it still has a four-star predictability rank. GuruFocus data shows companies with this rank return, on average, 9.8% annually.

With 0.74% of outstanding shares, Pioneer is the company's largest guru shareholder. Other top guru investors include Ken Fisher (Trades, Portfolio), Cohen, Bacon, Lee Ainslie (Trades, Portfolio), Jones, Dalio and Greenblatt.

Intel

Price increased his stake in Intel by 8.05%, buying 165,600 shares. The transaction had an impact of 1.56% on the equity portfolio. During the quarter, shares traded for an average price of $52.07 each.

He now holds 2.22 million shares total, accounting for 20.87% of the equity portfolio. It is also the guru's largest holding, which GuruFocus estimates he has gained 64.64% on since the fourth quarter of 2011.

The Santa Clara, California-based tech company, which manufactures computer components like microprocessors and chipsets, has a $207.28 billion market cap; its shares were trading around $50.58 on Tuesday with a price-earnings ratio of 9.85, a price-book ratio of 2.77 and a price-sales ratio of 2.77.

According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 also leans toward undervaluation.

Driven by a comfortable level of interest coverage, GuruFocus rated Intel's financial strength 6 out of 10. The Altman Z-Score of 3.41 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. 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.

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

Additional trades and portfolio composition

Other new positions Price established during the quarter included Arista Networks Inc. (ANET, Financial), Open Lending Corp. (LPRO, Financial), Noble Energy Inc. (NBL, Financial), Bank of San Francisco (BSFO, Financial) and Bausch Health Companies Inc. (BHC, Financial).

Nearly half of the guru's $551 million equity portfolio, which is composed of 116 stocks, is invested in the financial services and technology sectors. The communication services and consumer defensive spaces have smaller representations.

Disclosure: I have a position in Tiffany.