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Graham Griffin
Graham Griffin
Articles (169) 

T Rowe Price Equity Income Fund's Top 4th-Quarter Trades

Top holding Qualcomm cut down to size

The T Rowe Price Equity Income Fund (Trades, Portfolio) has revealed its portfolio for the fourth quarter ending on Dec. 31, 2020. Top trades included reductions in the fund's top holding Qualcomm Inc. (NASDAQ:QCOM) alongside Enbridge Inc. (NYSE:ENB) and Fox Corp. (NASDAQ:FOX). As well, the fund saw two new buys in Goldman Sachs Group Inc. (NYSE:GS) and Citrix Systems Inc. (NASDAQ:CTXS).

The fund uses a conservative, value-orientated strategy to pursue substantial dividend income and long-term growth potential. Investments are made in common stocks of established firms that are expected to pay above-average dividends and appear to be out of favor or undervalued. The fund generally invests 80% of its net assets and emphasizes large-capitalization stocks that have a strong track record of paying dividends.

Portfolio overview

At the end of the quarter, the portfolio contained 106 stocks, with seven new holdings. It was valued at $16.23 billion and has seen a turnover rate of 5%. Top holdings include Qualcomm, Wells Fargo & Co. (NYSE:WFC), Southern Co. (NYSE:SO), General Electric Co. (NYSE:GE) and DuPont de Nemours Inc. (NYSE:DD).

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By weight, the top three represented sectors are financial services (21.44%), health care (13.23%) and industrials (12.45%).

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Qualcomm

The portfolio's top holding, Qualcomm (NASDAQ:QCOM), saw a 20.49% reduction with the sale of 875,000 shares. The shares traded at an average price of $139.81 during the quarter. Overall, the sale had an impact of -0.74% on the portfolio and GuruFocus estimates the total gain of the holding at 76.86%.

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Qualcomm develops and licenses wireless technology and also designs chips for smartphones. The company's key patents revolve around CDMA and OFDMA technologies, which are standards in wireless communications that are the backbone of all 3G and 4G networks. The company is a leader in 5G network technology as well. It is also the world's largest wireless chip vendor, supplying nearly every premier handset maker with leading-edge processors.

As of Jan. 15, the stock was trading at $157.09 per share with a market cap of $177.67 billion. The GF Value Line shows that the stock was trading at a significantly overvalued level.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 2 out of 10. There was one severe warning sign for a Beneish M-Score of -1.02, indicating the company might have manipulated its financial results. Cash flows have decreased over the last two years, but dividend payouts are still supported by free cash flow.

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Goldman Sachs

For the first time since 2009, the fund saw the addition of a new buy in Goldman Sachs (NYSE:GS). The fourth quarter saw the holding established with 360,000 shares that traded at an average price of $223.71 each during the quarter. The purchase had an overall impact of 0.58% on the portfolio and the holding has gained the fund an estimated 68.39% through its duration.

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Goldman Sachs is a leading global investment banking firm whose activities are organized into investment banking, global markets, asset management and consumer and wealth management segments. Approximately 60% of the company's net revenue is generated in the Americas, 15% in Asia and 25% in Europe, the Middle East and Africa. In 2008, Goldman reorganized itself as a financial holding company regulated by the Federal Reserve System.

On Jan. 15, the stock was trading at $301.01 per share with a market cap of $103.57 billion. According to the GF Value Lline, the stock was trading at fair value.

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GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 5 out of 10 and a valuation rank of 6 out of 10. There was one severe warning sign issued for poor financial strength. Overall debt levels have decreased slightly the last few years, but the cash-to-debt ratio of 0.53 ranks the company lower than 76.56% of the industry.

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Enbridge

The fourth quarter saw a relative newcomer to the portfolio, Enbridge (NYSE:ENB), cut by 46.89% with the sale of 2.26 million shares. The shares traded at an average price of $30.49 during the quarter. Overall, the sale represented a -0.47% impact on the portfolio and the fund has gained an estimated 4.01% on the holding since it was first purchased.

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Enbridge is an energy generation, distribution and transportation company in the U.S. and Canada. Its pipeline network consists of the Canadian Mainline system, regional oil sands pipelines and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada's largest natural gas distribution company. Additionally, Enbridge generates renewable and alternative energy with 2,000 megawatts of capacity.

Jan. 15 saw the stock trading at $35.26 per share with a market cap of $71.86 billion. The GF Value Line showed the stock trading at a modestly overvalued level.

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GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 2 out of 10. There were three severe warning signs for declining revenue per share, poor financial strength and an Altman Z-Score of 0.85 placing the company in the distress column. The weighted average cost of capital is higher than the return on invested capital, indicating the company will destroy value as it grows.

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Citrix Systems

The second most impactful new buy of the quarter came from Citrix Systems (NASDAQ:CTXS). The fund saw the addition of 460,000 shares that traded at an average price of $126.99 during the quarter. Overall, the purchase had an impact of 0.37% and GuruFocus estimates the total estimated gain of the holding at 3.95%.

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Citrix Systems provides virtualization software, including Virtual Apps and Desktops for desktop virtualization and Citrix Virtual Apps for application virtualization. The company also provides Citrix Endpoint Management for mobile device management and Citrix ADC for application delivery and Citrix SDWAN for routing, security and WAN monitoring.

As of Jan. 15, the stock was trading at $132 per share with a market cap of $16.25 billion. According to the GF Value Line, the stock was trading at fair value.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 5 out of 10. There was one severe warning sign issued for poor quality of earnings. The strong profitability rank is propped up by operating and net margins that beat almost 90% of the industry.

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Fox

The fund also cut its holding in Fox (NASDAQ:FOX) by 31.66% with the sale of 1.83 million shares. During the quarter, the shares traded at an average price of $27.72. The sale had an overall impact of -0.37% and GuruFocus estimates the total loss on the holding at 21.27%.

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Fox represents the assets not sold to Disney by the predecessor firm, Twenty First Century Fox. The remaining assets include Fox News, the FOX broadcast network, FS1 and FS2, Fox Business, Big Ten Network, 28 owned and operated local television stations, of which 17 are affiliated with the Fox Network, and the Fox Studios lot. The Murdoch family continues to control the successor company, which represents a large-scale bet on the value of live sports and news in the U.S. market.

On Jan. 15, the stock was trading at $30.39 per share with a market cap of $18.46 billion. The Peter Lynch Chart suggested the stock was trading below intrinsic value at the end of 2020.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rank of 5 out of 10. There were no severe warning signs issued. Debt increased the last two years and the cash-to-debt ratio of 0.6 ranks the company lower than 60.15% of the media industry.

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Disclosure: Author owns no stocks mentioned.

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