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Margaret Moran
Margaret Moran
Articles (451) 

First Pacific Advisors' Biggest Trades of the 4th Quarter

Value fund trims big tech positions, continues investing in energy

First Pacific Advisors (Trades, Portfolio) recently released its portfolio updates for the fourth quarter of 2020, which ended on Dec. 31.

The Los Angeles-based investment management firm emphasizes a research-based, low-risk value investing strategy that seeks to increase capital in the long term while avoiding a high chance of loss. With 88 employees and 31 investment professionals led by Chief Financial Officer J. Richard Atwood, First Pacific invests through several funds, including the FPA Capital Fund (Trades, Portfolio), the FPA Crescent Fund, the FPA International Value Fund and the FPA Paramount Fund.

Based on its investing strategy, the firm's top buys for the fourth quarter were FirstEnergy Corp. (NYSE:FE) and Aon PLC (NYSE:AON), while its top sells were Microsoft Corp. (NASDAQ:MSFT) and Baidu Inc. (NASDAQ:BIDU).

FirstEnergy

The firm established a new stake worth 4,217,859 shares in FirstEnergy (NYSE:FE), impacting the equity portfolio by 1.66%. During the quarter, shares traded for an average price of $29.99.

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FirstEnergy is an electric utility company based in Akron, Ohio. Operating through 10 regulated distribution companies, it is one of the largest publicly traded electric utilities in the U.S. It generates coal and hydro power for service to approximately 6 million customers.

On Feb. 12, shares of FirstEnergy traded around $31.21 for a market cap of $16.94 billion and a price-earnings ratio of 23.28. The GuruFocus Value chart rates the stock as modestly undervalued.

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The company has a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10. The current ratio of 0.7 and Altman Z-Score of 0.54 indicate that the company needs to raise additional liquidity to continue operating. The weighted average cost of capital has typically surpassed the return on invested capital, indicating struggles with profitability.

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Aon

The firm increased its investment in Aon (NYSE:AON) by 357,873 shares, or 39.89%, for a total holding of 1,254,963 shares. The trade had a 0.98% impact on the equity portfolio. Shares traded for an average price of $204.13 during the quarter.

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Based in London, Aon is a British global insurance company that sells a range of financial risk-mitigation products, including insurance, reinsurance and pension administration plans. It operates in 120 countries, and its biggest segment in terms of assets under management is the retirement segment.

On Feb. 12, shares of Aon traded around $227.09 for a market cap of $52.06 billion and a price-earnings ratio of 26.98. The GuruFocus Value chart rates the stock as modestly overvalued.

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The company has a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.14 is lower than 95% of competitors, but the Piotroski F-Score of 8 out of 9 is typical of a financially healthy company. The three-year revenue growth rate is 7.4%, while the three-year Ebitda growth rate is 24.4%.

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Microsoft

The firm trimmed its Microsoft (NASDAQ:MSFT) stake by 1,126,615 shares, or 97.69%, leaving a remaining holding of 26,660 shares and impacting the equity portfolio by -3.29%. During the quarter, shares traded for an average price of $215.07.

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Microsoft is a multinational tech giant headquartered in Redmond, Washington. The company develops, manufactures, licenses, sells and supports PCs, consumer and enterprise software, consumer and enterprise electronics and related services.

On Feb. 12, shares of Microsoft traded around $244.37 for a market cap of $1.84 trillion and a price-earnings ratio of 36.33. The GuruFocus Value chart rates the stock as significantly overvalued.

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The company has a financial strength rating of 7 out of 10 and a profitability rating of 9 out of 10. The Piotroski F-Score of 8 out of 9 and Altman Z-Score of 8.18 indicate a fortress-like balance sheet. The operating margin of 37.03% and net margin of 30.96% are still beating 97% of other companies in the industry, even though both have been on a general downtrend for the company.

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Baidu

The firm also reduced its stake in Baidu Inc. (NASDAQ:BIDU) by 953,879 shares, or 49.14%, for a remaining holding of 987,203 shares. The trade had a -1.68% impact on the equity portfolio. Shares traded for an average price of $148.88 during the quarter.

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Baidu is a Chinese Internet and technology giant that specializes in artificial intelligence, Internet services, search engines and related products. It has access to the world's largest domestic addressable population of internet users.

On Feb. 12, shares of Baidu traded around $312.74 for a market cap of $106.61 billion and a price-earnings ratio of 31.57. The GuruFocus Value chart rates the stock as significantly overvalued.

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The company has a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. Although the interest coverage ratio is low at 4.7, the Altman Z-Score of 4.24 shows the company is not in danger of bankruptcy. The ROIC was in a downtrend over recent years, even dropping below the WACC at one point, but the metric showed signs of recovery in 2019.

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Portfolio overview

As of the quarter's end, the firm held 163 common stock positions valued at a total of $7.76 billion. Its top holdings were Comcast Corp. (NASDAQ:CMCSA) with 6.66% of the equity portfolio, American International Group Inc. (NYSE:AIG) with 5.45% and Broadcom Inc. (NASDAQ:AVGO) with 5.43%.

In terms of sector weighting, the firm was most invested in communication services, financial services and technology.

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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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