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Graham Griffin
Graham Griffin
Articles (194) 

Primecap Management's Top Trades of the 4th Quarter

Several top holdings cut down to size

PRIMECAP Management (Current Portfolio) has revealed its portfolio for the fourth quarter. Major trades include a new buy in Morgan Stanley (NYSE:MS) and reductions in Qualcomm Inc. (NASDAQ:QCOM), Adobe Inc. (NASDAQ:ADBE), Microsoft Corp. (NASDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOG).

The Primecap team evaluates securities based on their outlook over a three- to five-year time horizon, with the intention of holding them considerably longer if their fundamentals warrant it. They believe successful investment decisions rest in correctly appraising the relationship between the fundamental value of a company and the market price of its stock.

Portfolio overview

At the end of the fourth quarter, Primecap's portfolio contained 319 stocks, with 19 new holdings. It is valued at $134.54 billion and has seen a turnover rate of 2%. Top holdings include Eli Lilly and Co. (NYSE:LLY), Microsoft, Adobe, Amgen Inc. (NASDAQ:AMGN) and Biogen Inc. (NASDAQ:BIIB).

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By weight, the top three sectors represented are technology (32.18%), health care (26.16%) and industrials (12.35%).

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Morgan Stanley

The team established a new holding in Morgan Stanley (NYSE:MS) during the fourth quarter. They bought 12.07 million shares that traded at an average price of $57.54 during the quarter. Overall, the purchase had an impact of 0.61% on the portfolio and GuruFocus estimates the total gain at 29.25% during the short lifetime of the holding.

c201ca9dc91ea7f7df26293628eb1d7c.pngMorgan Stanley is a global investment bank whose history, through its legacy firms, can be traced back to 1924. The company has institutional securities, wealth management and asset management segments. The company had $2.7 trillion of client assets as well as more than 60,000 employees at the end of 2019. Approximately half of the company's net revenue is from its institutional securities business, with the other half coming from wealth and asset management. The company derives about 30% of its total revenue outside the Americas.

On Feb. 9, the stock was trading at $74.31 per share with a market cap of $134.19 billion. According to the GF Value Line, the stock is trading at a modestly overvalued rating.

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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 5 out of 10. There is currently one severe warning sign issued for poor financial strength. The cash-to-debt ratio of 0.47 ranks the company lower than 79.56% of the industry.

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Qualcomm

The team's longstanding Qualcomm (NASDAQ:QCOM) holding was reduced by 34.35% with the sale of 6.06 million shares. During the quarter, the shares traded at an average price of $139.59. GuruFocus estimates the firm has gained a total of 118.58% on the holding and the sale had an impact of -0.59% on the equity portfolio.

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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 firm is a leader in 5G network technology as well. Qualcomm's IP is licensed by virtually all wireless device makers. The firm is also the world's largest wireless chip vendor, supplying nearly every premier handset maker with leading-edge processors.

As of Feb. 9, the stock was trading at $146.12 with a market cap of $166.62 billion. The GF Value Line shows the stock trading at a significantly overvalued rating.

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GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 4 out of 10. There are not any severe warning signs listed. The company's current return on invested capital easily supports the weighted average cost of capital, which will allow value to grow alongside the company.

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Adobe

The position in Adobe (NASDAQ:ADBE), one of Primecap's top holdings, was cut by 9.11%. The team sold 863,795 shares that traded at an average price of $482.85 throughout the fourth quarter. Overall, the sale had an impact of -0.35% on the portfolio and GuruFocus estimates Primecap has gained a whopping 968.17% throughout the lifetime of the holding.

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Adobe provides content creation, document management and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content across multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions and publishing for legacy products.

The stock was trading at $495.36 per share with a market cap of $237.60 billion on Feb. 9. It is modestly overvalued according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 2 out of 10. There are no severe warning signs listed. The strong profitability rank is propped up by operating and net margin percentages that beat over 96% of the industry.

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Microsoft

Another top holding in the portfolio, Microsoft (NASDAQ:MSFT), was also chipped away at with the sale of 1.69 million shares. The sale reduced the holding by 7.75% and the shares traded at an average price of $215.07 during the quarter. Overall, the sale had an impact of -0.29% and GuruFocus estimates the total gain of the holding at 557.56%.

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Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes, intelligence cloud and more personal computing.

On Feb. 9, the stock was trading at $243.77 per share with a market cap of $1.84 trillion. According to the GF Value Line, the stock is trading at a significantly overvalued rating.

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GuruFocus gives the company a financial strength rating of 7 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 1 out of 10, in line with the GF Value Line. There is currently one severe warning sign issued for assets growing faster than revenue. Microsoft has consistently increased cash flows over the last and they easily support the payout of dividends.

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Alphabet

Rounding out the top five trades for the team was a reduction in the holding of Alphabet (NASDAQ:GOOG). The holding was reduced by 17.40% with the sale of 222,448 shares. During the quarter, the shares traded at an average price of $1,690.43. The sale had an overall impact of -0.27% and GuruFocus estimates the team has gained 172.02% on the holding.

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Alphabet is a holding company, with Google, the internet media giant, as a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google's other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone and smart homes products, which include Nest and Google Home, also contribute to other revenue.

As of Feb. 9, the stock was trading at $2,083.51 per share with a market cap of $1.40 trillion. The GF Value Line shows the stock trading at a modestly overvalued rating.

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GuruFocus gives the company a financial strength rating of 8 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 3 out of 10. There are currently three severe warning signs issued for declining gross and operating margins and assets growing faster than revenue. The company has significantly increased both revenue and net income over the last five years.

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Disclosure: Author owns no stocks mentioned.

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