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Margaret Moran
Margaret Moran
Articles (451) 

Top 4th-Quarter Trades of the Smead Value Fund

Contrarian fund invests in energy, sells out of troubled bank major

February 10, 2021 | About:

The Smead Value Fund (Trades, Portfolio) recently disclosed its portfolio updates for its fiscal fourth quarter of 2020, which ended on Nov. 30.

The fund operates under Smead Capital Management. Its contrarian investing strategy is based on large-cap stocks that meet the following criteria: serve an economic need, have a strong competitive advantage, have a long history of profitability and strong operating metrics, generate high levels of free chase flow, are undervalued, have a strong balance sheet, show insider ownership and have a history of friendly relations between management and shareholders. The fund is managed by lead portfolio manager Bill Smead, along with co-portfolio managers Tony Scherrer, CFA and Cole Smead, CFA.

Based on its investing criteria, the fund's top buys for the quarter were ConocoPhillips (NYSE:COP) and Continental Resources Inc. (NYSE:CLR), while its biggest sells were Wells Fargo & Co. (NYSE:WFC) and Booking Holdings Inc. (NASDAQ:BKNG).

ConocoPhillips

The fund established a new holding of 692,544 shares in ConocoPhillips (NYSE:COP), impacting the equity portfolio by 2.30%. During the quarter, shares traded for an average price of $34.55.

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ConocoPhillips is a multinational energy company headquartered in Houston. As one of the world's largest explorers and producers of oil and natural gas and one of the "Big Five" U.S. oil giants, it enjoys benefits such as government subsidies while also having the strongest balance sheet among its large-cap peers.

On Feb. 10, shares of ConocoPhillips traded around $47.17 for a market cap of $63.88 billion. The GuruFocus Value chart gives the stock a rating of modestly overvalued.

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The company has a financial strength rating of 5 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 0.51 is above the industry median of 0.41, while the Altman Z-Score of 2.27 indicates the company is experiencing some financial distress. The operating margin and net margin are currently deep in the negatives, as they were in 2015, indicating current operations are not profitable.

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Continental Resources

The fund upped its stake in Continental Resources (NYSE:CLR) by 1,358,222 shares, or 209.69%, for a total holding of 2,005,955. The trade had a 1.75% impact on the equity portfolio. Shares traded for an average price of $13.88 during the quarter.

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Continental Resources is an independent petroleum and natural gas exploration and production company based in Oklahoma City. With reserves in North Dakota and Oklahoma, the company produces and sells its products exclusively in the U.S. and has one of the "best deep oil inventories in the industry."

On Feb. 10, shares of Continental Resources traded around $23.16 for a market cap of $8.46 billion. The GuruFocus Value chart gives the stock a rating of fairly valued.

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The company has a financial strength rating of 3 out of 10 and a profitability rating of 7 out of 10. The interest coverage ratio of 0.24 means the company will need to borrow additional funds in order to make payments on its debt, while the Altman Z-Score of 1.22 indicates the company is in danger of bankruptcy. The company has heavily utilized leverage to grow, recording a three-year revenue growth rate of 32.5% and a three-year Ebitda growth rate of 32.6%.

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Wells Fargo

The fund sold out of its 843,243-share investment in Wells Fargo (NYSE:WFC), impacting the equity portfolio by -1.89%. Shares traded for an average price of $24.10 during the quarter.

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Wells Fargo is a U.S. bank major that is still reeling from the aftershocks of a fake account scandal back in 2016. After the incident, Wells Fargo has been subject to restrictions such as an asset cap and, more recently, being required to donate any interest paid on loans from the government's Covid-19 loan programs (a restriction not placed on other banks).

On Feb. 10, shares of Wells Fargo traded around $33.35 for a market cap of $138.24 billion. The GuruFocus Value chart warns the stock is a possible value trap due to how sharply the price has declined.

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The company has a financial strength rating of 3 out of 10 and a profitability rating of 5 out of 10. While the cash-debt ratio of 0.97 is lower than 62% of industry peers, the Piotroski F-Score of 5 out of 9 is typical of a financially stable company. The return on equity of 0.92% and return on assets of 0.17% are underperforming 89% of the sector.

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Booking Holdings

The fund also exited its 8,911-share stake in Booking Holdings (NASDAQ:BKNG), impacting the equity portfolio by -1.58%. During the quarter, shares traded for an average price of $1,818.26.

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Based in Norwalk, Connecticut, Booking Holdings is a world leader in online travel services, providing booking services for everything from flights and cars to hotels and vacation packages. The company's focus is mainly on the more fragmented European and Asian hotel markets rather than the U.S. market.

On Feb. 10, shares of Booking Holdings traded around $2,156.68 for a market cap of $87.63 billion. The GuruFocus Value chart gives the stock a rating of significantly overvalued.

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The company has a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The Piotroski F-Score of 5 out of 9 and Altman Z-Score of 5.63 indicate a fortress-like balance sheet. The return on invested capital is consistently higher than the weighted average cost of capital, meaning the company is creating value for shareholders.

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Portfolio overview

As of the quarter's end, the Smead Value Fund (Trades, Portfolio) held common stock positions in 29 companies valued at a total of $1.19 billion, with a turnover rate of 8% for the period. The top holdings were Target Corp. (TGT) with 7.80% of the equity portfolio, NVR Inc. (NVR) with 6.23% and Discovery Inc. (DISCA) with 6.13%.

In terms of sector weighting, the fund was most invested in the consumer cyclical, financial services and communication services industries.

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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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