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Graham Griffin
Graham Griffin
Articles (190) 

Hotchkis & Wiley's Top 5 Trades of the 4th Quarter

Changes to top holdings Citigroup and GE

Hotchkis & Wiley (Trades, Portfolio) have revealed its portfolio for the fourth quarter of 2020. Major trades include reductions in General Electric Co. (NYSE:GE) and FedEx Corp. (NYSE:FDX), new buys in Bristol-Myers Squibb Co. (NYSE:BMY) and Host Hotels & Resorts Inc. (NASDAQ:HST) and an addition to the firm's Citigroup Inc. (NYSE:C) holding.

The Los Angeles-headquartered investment firm focuses exclusively on finding and owning undervalued companies that have a significant potential for appreciation. Its focused, value-orientated approach looks to parameters such as a company's tangible assets, sustainable cash flow and potential for improving business performance to find profitable investments.

Portfolio overview

At the end of the quarter, the portfolio contained 467 stocks, with 75 new holdings. It was valued at $28.56 billion and has seen a turnover rate of 7%. Top holdings at the end of the quarter were American International Group Inc. (NYSE:AIG), Citigroup, General Electric, Wells Fargo & Co. (NYSE:WFC) and Anthem Inc. (NYSE:ANTM).

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By weight, the top three sectors represented are financial services (31.12%), industrials (12.60%) and technology (11.79%).

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General Electric

The firm's General Electric (NYSE:GE) holding was cut by 29.48% with the sale of 48.43 million shares. The sale represents the second time the holding has been reduced and the shares traded at an average price of $9.03 per share during the quarter. Overall, the sale had a -1.37% impact on the portfolio and GuruFocus estimates the total estimated gain of the portfolio at 26.82%.

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GE is known for its digital industrial offerings and massive installed base spread across a variety of products and services, including aircraft engines, gas turbines, wind turbines and medical diagnostic equipment, among others. After the sale of GE Transportation to Wabtec and a majority of its stake in Baker Hughes, as well as the sale of GE Biopharma to Danaher, the company's focus turns to aviation, legacy health care, power and renewable energy. The company continues to embark on a multiyear turnaround under the lean manufacturing expertise of former Danaher CEO H. Lawrence Culp, who has slowly started to shift GE's culture in a positive direction.

On March 1, the stock was trading at $13.27 per share with a market cap of $116.22 billion. 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 4 out of 10, a profitability rank of 5 out of 10 and a valuation rank of 6 out of 10. There are currently two severe warning signs issued for revenue per share declining and an Altman Z-Score of 1.38 placing the company in the distress column. The company's cash-to-debt ratio of 0.59 ranks the company lower than 61.99% of competitors despite a significant reduction in debt since 2010.

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Bristol-Myers Squibb

The firm made a new buy into Bristol-Myers Squibb (NYSE:BMY) for the first time since the holding was sold in 2010. The new holding was established with the purchase of 2.74 million shares that traded at an average price of $61.52 per share during the quarter. GuruFocus estimates the total gain of the holding at 13.89% and the purchase had a 0.60% impact on the portfolio.

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Bristol-Myers Squibb discovers, develops and markets drugs for various therapeutic areas, such as cardiovascular, oncology and immune disorders. A key focus for Bristol is immuno-oncology, where the company is leading in drug development. Unlike some of its more diversified peers, Bristol has exited several nonpharmaceutical businesses to focus on branded specialty drugs, which tend to support strong pricing power.

As of March 1, the stock was trading at $61.75 per share with a market cap of $138.37 billion. The GF Value Line shows the stock trading at a modestly undervalued rating.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 9 out of 10. There are currently five severe warning signs issued, including new long-term debt, assets growing faster than revenue and an operating margin in decline. The company's operating margin of 5.12% ranks it lower than 50.98% of the drug manufacturers industry and is the lowest in the company's last 10 years.

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Citigroup

Citigroup (NYSE:C) was boosted by the firm by 14.31% with the purchase of 2.54 million shares. During the quarter, the shares traded at an average price of $50.95. Overall, the purchase had a 0.55% impact on the portfolio and GuruFocus estimates the total gain of the holding at 38.09%.

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Citigroup is a global financial services company doing business in more than 100 countries and jurisdictions. Citigroup's operations are organized into two primary segments: the global consumer banking segment, which provides basic branch banking around the world, and the institutional clients group, which provides large customers around the globe with investment banking, cash management and other products and services.

The stock was trading at $69.92 per share with a market cap of $145.42 billion on March 1. The shares are modestly undervalued according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 4 out of 10 and a valuation rank of 8 out of 10. There are currently two severe warning signs issued for a low Piotroski F-Score of 3 and poor financial strength. Since 2015, free cash flow has fluctuated while the company has maintained positive net income.

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FedEx

The firm drew back it's FedEx (NYSE:FDX) holding for the second time in 2020 during the fourth quarter. The holding was reduced by 21.87% with the sale of 458,790 shares. The shares traded at an average price of $277.34 during the quarter. The firm has gained an estimated 73.25% throughout the lifetime of the holding and the sale had a -0.53% impact on the portfolio overall.

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FedEx pioneered overnight delivery in 1973 and remains the world's largest "express" package provider. In its fiscal 2020 (ended May 2020), FedEx derived 51% of revenue from its express division, 33% from ground and 10% from freight; its asset-based less-than-truckload shipping segment. The remainder comes from other services, including FedEx Office, which provides document production and shipping and FedEx Logistics, which provides global forwarding. FedEx acquired Dutch parcel delivery firm TNT Express in 2016. TNT was previously the fourth-largest global parcel-delivery provider.

On March 1, the stock was trading at $263.49 per share with a market cap of $69.84 billion. According to the GF Value Line, the shares are trading at a modestly overvalued rating.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 5 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. The company has struggled with a weighted average cost of capital that exceeds its return on invested capital since 2015.

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Host Hotels & Resorts

A new buy was established by the firm in Host Hotels & Resorts (NASDAQ:HST) during the fourth quarter. Managers purchased 8.15 million shares that traded at an average price of $12.97 per share during the quarter. In its short lifetime, the holding has gained the firm an estimated 27.07% and the purchase had a 0.42% impact on the portfolio.

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Host Hotels & Resorts owns over 80 predominantly urban and resort upper upscale and luxury hotel properties representing over 47,000 rooms, mainly in the United States. Host recently sold off the company's interests in a joint venture owning a portfolio of hotels throughout Europe and also sold other joint ventures that owned properties in Asia and the United States. The majority of Host's portfolio operates under the Marriott and Starwood brands.

On March 1, the stock was trading at $16.55 per share with a market cap of $11.66 billion. The shares are significantly overvalued according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 2 out of 10. There is currently one severe warning sign issued for an Altman Z-Score of 0.99 placing the company in the distress column. The company was maintaining strong revenue and consistent net income before things took a dive in 2020 due in part to the ongoing pandemic.

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Disclosure: Author owns no stocks mentioned.

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