The Top 5 Trades of Ronald Muhlenkamp's Firm

Firm discloses 4th-quarter portfolio

Feb 25, 2021

Muhlenkamp & Co. Inc., the investment firm founded by Ronald Muhlenkamp (Trades, Portfolio), released its portfolio for the fourth quarter earlier this month.

While he is still acting as the firm's chairman, Muhlenkamp passed most operational responsibilities on to his sons in 2019. With the goal of maximizing returns through capital appreciation, as well as income from dividends and interest, his Wexford, Pennsylvania-based firm typically invests in highly profitable companies trading at a discount. When picking stocks, it seeks companies with strong balance sheets and high returns on equity. The firm believes that over time, stock prices reflect the companies' underlying value and that the long-term business of investing offers a higher chance of profitability and reliability.

In his quarterly letter to shareholders, Muhlenkamp noted three things really mattered to the economy and financial markets in 2020: the spread of the Covid-19 virus, the government's response to slowing the spread of the virus and its actions to quell the damage done to the economy. While the actions taken remain "a work in progress," the guru noted the firm will "continue to watch for inflation" since "the current low interest rates do not compensate investors for the risk of inflation."

Based on these considerations, the firm disclosed it entered five new positions, sold out of one stock and added to or trimmed a slew of other existing holdings during the quarter. The most notable trades included new positions in WESCO International Inc. (WCC, Financial), Baidu Inc. (BIDU, Financial) and Schlumberger Ltd. (SLB, Financial), a reduction in its holding of the SSGS SPDR Gold Shares (GLD, Financial) exchange-traded fund and a boost to Kirby Corp. (KEX, Financial).

WESCO International

Having previously sold out of WESCO International (WCC, Financial) in the second quarter of 2011, the firm invested in a new 130,683-share holding, allocating it to 4.13% of the equity portfolio. It is now the firm's eighth-largest holding. The stock traded for an average price of $59.47 per share during the quarter.

The Pittsburgh-based supply chains solutions company, which provides electrical supplies, logistics expertise and systems capabilities, has a $4.18 billion market cap; its shares were trading around $83.62 on Thursday with a price-earnings ratio of 59.73, a price-book ratio of 1.29 and a price-sales ratio of 0.33.

The GF Value line suggests the stock is fairly valued based on its historical ratios, past performance and future earnings projections. The GuruFocus valuation rank of 7 out of 10, however, leans more toward undervaluation even though the share price and price ratios are approaching multiyear highs.

GuruFocus rated WESCO's financial strength 4 out of 10 on the back of poor interest coverage and a low Altman Z-Score of 1.68 that indicates the company could be at risk of going bankrupt. In addition to its assets building up at a faster rate than its revenue is growing, the Sloan ratio indicates the company has poor earnings quality. The return on invested capital is also being eclipsed by the weighted average cost of capital, implying issues with creating value while the company grows.

The company's profitability scored a 7 out of 10 rating despite having a declining operating margin. WESCO is also being weighed down by returns that underperform a majority of industry peers, but has a moderate Piotroski F-Score of 4, which implies business conditions are stable. Consistent earnings and revenue growth also contributed to a predictability rank of 2.5 out of five stars. According to GuruFocus, companies with this rank return an average of 7.3% annually over a 10-year period.

Of the gurus invested in WESCO, Diamond Hill Capital (Trades, Portfolio) has the largest stake with 4.83% of outstanding shares. Robert Olstein (Trades, Portfolio), Richard Snow (Trades, Portfolio), Hotchkis & Wiley, Bernard Horn (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss also have positions in the stock.

Baidu

Muhlenkamp's firm picked up 27,033 shares of Baidu (BIDU, Financial), dedicating 2.35% of the equity portfolio to the position. Shares traded for an average price of $148.88 each during the quarter.

The Chinese company, which provides internet services and products as well as artificial intelligence, has a market cap of $102.49 billion; its shares were trading around $299.22 on Thursday with a price-earnings ratio of 31.28, a price-book ratio of 3.98 and a price-sales ratio of 6.61.

According to the GF Value line, the stock is significantly overvalued.

Baidu's financial strength was rated 6 out of 10 by GuruFocus. Despite having poor interest coverage and assets that are building up faster than revenue is growing, the Altman Z-Score of 4.19 indicates the company is in good standing. The ROIC is also below the WACC, suggesting poor value creation.

The company's profitability fared better, scoring an 8 out of 10 rating. Although the operating margin is in decline, Baidu has strong returns that outperform over half of its industry peers and a high Piotroski F-Score of 7, which indicates business conditions are healthy. Although revenue per share growth has slowed down over the past 12 months, the company has a one-star predictability rank. GuruFocus says companies with this rank return an average of 1.1% annually.

With a 2.79% stake, PRIMECAP Management (Trades, Portfolio) is the company's largest guru shareholder. Other top guru investors include Jim Simons (Trades, Portfolio)' Renaissance Technologies, Dodge & Cox, John Rogers (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Catherine Wood (Trades, Portfolio), David Herro (Trades, Portfolio) and Tweedy Browne (Trades, Portfolio).

Schlumberger

After previously selling out of Schlumberger (SLB, Financial) in the third quarter of 2017, the firm entered a new holding of 179,410 shares. The transaction had an impact of 1.58% on the equity portfolio. The stock traded for an average per-share price of $18.93 during the quarter.

The oilfield services company, which is headquartered in Houston, has a $40.35 billion market cap; its shares were trading around $28.98 on Thursday with a price-book ratio of 3.34 and a price-sales ratio of 1.71.

Based on the GF Value line, the stock appears to be fairly valued currently. The GuruFocus valuation rank of 8 out of 10, however, favors undervaluation even though the share price and price-sales ratio are approaching one-year highs.

On the back of insufficient interest coverage, GuruFocus rated Schlumberger's financial strength 4 out of 10. The Altman Z-Score of 0.84 also warns the company could be in danger of bankruptcy if it does not improve its liquidity position. Additionally, the company's Sloan ratio is indicative of poor earnings quality and the WACC surpasses the ROIC, implying poor value creation.

The company's profitability did not fare much better, scoring a 5 out of 10 rating as a result of declining margins and negative returns that underperform a majority of competitors. Schlumberger also has a low Piotroski F-Score of 3, suggesting operations are in poor shape, and a five-year decline in revenue per share led to a one-star predictability rank.

Dodge & Cox is Schlumberger's largest guru shareholder with a 5.5% stake. First Eagle Investment (Trades, Portfolio), Pioneer, Ken Fisher (Trades, Portfolio), Hotchkis & Wiley, Simons' firm, David Carlson (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) also have large holdings in the stock.

SSGS SPDR Gold Shares

The firm curbed its position in the SSGA SPDR Gold Shares (GLD, Financial) ETF by 31.72%, selling 22,095 shares. The transaction had an impact of -2.03% on the equity portfolio. During the quarter, the stock traded for an average price of $176.05 per share.

It now holds 47,559 shares total, which account for 3.41% of the equity portfolio. Muhlenkamp's firm has gained an estimated 37.2% on the investment according to GuruFocus.

Managed by State Street Global Advisors, the ETF, which tracks the performance of gold bullion, was trading at $166.25 on Thursday with a 14-day relative strength index of 43.7. The price has fallen 5.25% year to date.

With a 0.98% stake, First Eagle is the ETF's largest guru shareholder. Other gurus with large holdings include Ray Dalio (Trades, Portfolio), Caxton Associates (Trades, Portfolio), John Paulson (Trades, Portfolio), David Einhorn (Trades, Portfolio), Alan Fournier (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Cohen, Murray Stahl (Trades, Portfolio), Simons' firm, John Hussman (Trades, Portfolio) and Fisher.

Kirby

With an impact of 1.64% on the equity portfolio, the firm upped its Kirby (KEX, Financial) holding by 90.65%, buying 78,408 shares. During the quarter, shares traded for an average price of $45.71 each.

The firm now holds 164,903 shares total, representing 3.44% of the equity portfolio. GuruFocus data shows it has gained around 46.36% on the investment since establishing it in the third quarter.

The Houston-based company, which is a tank barge operator that transports bulk liquid products, has a market cap of $3.87 billion; its shares were trading around $64.24 on Thursday with a price-book ratio of 1.25 and a price-sales ratio of 1.77.

According to the GF Value line, the stock is fairly valued currently. The GuruFocus valuation rank of 6 out of 10 supports this assessment even though the share price and price-sales ratio are nearing one-year highs.

Kirby's financial strength was rated 6 out of 10 by GuruFocus. As a result of issuing approximately $547.4 million in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 1.7 also warns the company could face bankruptcy if it does not improve its liquidity. In addition to assets building up at a faster rate than revenue is growing, the ROIC is eclipsed by the WACC, indicating issues with creating value.

The company's profitability scored a 7 out of 10 rating. In addition to a declining operating margin, Kirby is being weighed down by negative returns that underperform a majority of industry peers. It also has a moderate Piotroski F-Score of 4, but the one-star predictability rank is on watch as a result of a decline in revenue per share over the past year.

Diamond Hill is the company's largest guru shareholder with a 5.09% stake. Barrow, Hanley, Mewhinney & Strauss, Chuck Royce (Trades, Portfolio), PRIMECAP and Simons' firm also own the stock.

Additional trades and portfolio performance

Other new positions Muhlenkamp's firm established during the quarter were in Franco-Nevada Corp. (FNV, Financial) and Royal Gold Inc. (RGLD, Financial). It also sold out of Golar LNG Partners LP (GMLP, Financial) and expanded its holdings of Rush Enterprises Inc. (RUSHA, Financial) and Tenneco Inc. (TEN, Financial), among others.

Around 40% of the firm's $249 million equity portfolio, which is composed of 37 stocks, is invested in the health care and technology sectors.

According to the firm's website, the Muhlenkamp Fund returned 11.86% in 2020, slightly underperforming the S&P 500's 18.4% return.

Disclosure: No positions.