Oakmark Fund manager Bill Nygren (Trades, Portfolio) disclosed his fourth-quarter portfolio earlier this week.
To achieve long-term capital appreciation, the renowned guru, who also manages the Chicago-based firm's Select and Global Select funds, usually invests in mid- and large-cap companies. When picking stocks, he looks for growing companies that have shareholder-oriented management teams. According to the fund's fact sheet, he prefers to take a position when the stock is trading at a substantial discount to his estimate of intrinsic value, then waits for the gap between the two to close before selling.
In his market commentary for the fourth quarter, Nygren said that while 2020 "didn't turn out the way [he] had anticipated," he thinks "2022 will look a lot more like 2019 than 2020 and we expect to start seeing signs of that in the second half of 2021."
"Believing the new normal will be a lot like the old normal may make us outliers, but 'strong opinions weakly held' is business as usual for Oakmark," he added. "Our thesis for each investment, almost by definition, differs from consensus. Our responsibility is, and always has been, to monitor any new information to constantly challenge those theses. If we are correct that normal will return faster than others expect it will, we believe our stocks are well-positioned. But we know we could be wrong, so we will be carefully watching for any comments or data that would invalidate our thesis and call for altering our position."
Keeping these considerations in mind, Nygren established four new positions during the quarter in Diamondback Energy Inc. (FANG, Financial), Fiserv Inc. (FISV, Financial), KKR& Co. Inc. (KKR, Financial) and Concho Resources Inc. (CXO, Financial).
Diamondback Energy
After previously divesting of a position in Diamondback Energy (FANG, Financial) in the third quarter, Nygren established a new 2.6 million-share stake, allocating it 0.96% of the equity portfolio. The stock traded for an average price of $37.10 per share during the quarter.
The Midland, Texas-based oil and gas producer has an $11.52 billion market cap; its shares were trading around $72.90 on Tuesday with a price-book ratio of 10.65 and a price-sales ratio of 4.1.
The GF Value line shows the stock is modestly undervalued currently based on its historical ratios, past performance and projections of future earnings.
GuruFocus rated Diamondback's financial strength 3 out of 10. As a result of issuing approximately $3.2 billion in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of -0.34 warns the company could be in danger of going bankrupt, especially since its assets are building up at a faster rate than revenue is growing and the Sloan ratio is indicative of poor earnings quality. The return on invested capital is also being surpassed by the weighted average cost of capital, indicating issues with creating value.
The company's profitability fared better, scoring a 6 out of 10 rating on the back of an expanding operating margin. Returns, however, are negative and underperform a majority of competitors. Diamondback also has a low Piotroski F-Score of 3, indicating conditions are in poor shape, while losses in operating income and declining revenue per share have resulted in the predictability rank of one out of five stars to be on watch. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Diamondback, Nygren now has the largest stake with 1.65% of outstanding shares. Pioneer Investments (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) also own the stock.
Fiserv
The guru invested in 1 million shares of Fiserv (FISV, Financial), dedicating 0.86% of the equity portfolio to the stake. Shares traded for an average price of $107.82 each during the quarter.
The financial technology company, which is headquartered in Brookfield, Wisconsin, has a market cap of $77.21 billion; its shares were trading around $115.34 on Tuesday with a price-earnings ratio of 82.2, a price-book ratio of 2.43 and a price-sales ratio of 5.3.
According to the GF Value line, the stock is fairly valued currently. The GuruFocus valuation rank of 4 out of 10 leans more toward overvaluation, however, since the share price and price ratios are approaching multiyear highs.
In his fourth-quarter commentary, Nygren noted he expects Fiserv's revenue to grow in the mid- to high single digits and its earnings per share to grow more than 20% over the next several years.
"Furthermore, with its significant free cash flow generation and excess debt capacity, the company should be able to return nearly 40% of its market capitalization through dividends and share repurchases over the next five years," he wrote. "We believe the risk adjusted return potential is attractive for this well-managed, above-average business that's currently trading for a below-market multiple on our estimate of normal earnings."
Fiserv's financial strength was rated 4 out of 10 by GuruFocus. As a result of the company issuing approximately $14 billion in new long-term debt over the past several years, it has weak interest coverage. The Altman Z-Score of 1.67 also warns the company could be at risk of going bankrupt if it does not improve its liquidity. Assets are also building up at a faster rate than revenue is growing, indicating it may be becoming less efficient. The WACC also eclipses the ROIC, signaling poor value creation.
The company's profitability scored an 8 out of 10 rating. In addition to a declining operating margin, its returns overall underperform over half of its industry peers. Fiserv also has a moderate Piotroski F-Score of 5, suggesting business conditions are stable, and consistent earnings and revenue growth contributed to a 2.5-star predictability rank. GuruFocus says companies with this rank return an average of 7.3% annually.
With a 0.95% stake, Dodge & Cox is the company's largest guru shareholder. Other guru investors are Mairs and Power (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Pioneer, ValueAct Holdings LP (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Julian Robertson (Trades, Portfolio) and Bacon.
KKR & Co.
Nygren picked up 2.5 million shares of KKR & Co. (KKR, Financial), giving it 0.77% space in the equity portfolio. The stock traded for an average per-share price of $37.83 during the quarter.
The New York-based investment company, which manages multiple alternative asset classes, has a $26.58 billion market cap; its shares were trading around $45.91 on Tuesday with a price-earnings ratio of 14.5, a price-book ratio of 2.38 and a price-sales ratio of 6.59.
Based on the GF Value line, the stock appears to be significantly overvalued currently.
In his quarterly commentary, Nygren said he believes the market is undervaluing KKR due to its "large investments and the volatility of its performance fees."
"We estimate that KKR's investments are worth ~$16/share today, or 40% of its current market capitalization, which is considerably higher than its peers," he wrote. "After adjusting for these factors, the company's shares trade at a low-double-digit multiple of our forward earnings estimate. We find this valuation too cheap for a business with KKR's growth outlook and return profile."
GuruFocus rated KKR's financial strength 3 out of 10. As a result of issuing around $16.2 billion in new long-term debt over the past three years, the company has weak interest coverage. The Altman Z-Score of 0.88 also warns of its potential bankruptcy risk due to losses in operating income and declining revenue per share. The company is also having issues creating value as its ROIC is below the WACC.
The company's profitability scored a 5 out of 10 rating on the back of margins and returns that outperform more than half of its competitors. KKR also has a low Piotroski F-Score of 2 and a one-star predictability rank.
ValueAct is KKR's largest guru shareholder with a 6.64% stake. Chuck Akre (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), John Rogers (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies also have large positions in the stock.
Concho Resources
Having previously sold out of Concho Resources (CXO, Financial) in the third quarter, the guru entered a new 1.3 million-share stake, expanding the equity portfolio by 0.58%. During the quarter, the stock traded for an average price of $52.82 per share.
The oil and gas producer headquartered in Midland, Texas was acquired by ConocoPhillips (COP, Financial) on Jan. 15 in an all-stock deal valued at $9.7 billion.
GuruFocus estimates Nygren lost 30.61% on his investment.
The investor does not have position in ConocoPhillips currently.
Additional trades and portfolio performance
Other notable trades for the three months ended Dec. 31 include significant additions to the Citigroup Inc. (C, Financial), EOG Resources Inc. (EOG, Financial) and Apache Corp. (APA, Financial) stakes and reductions of the Netflix Inc. (NFLX, Financial) and Parker Hannifin Corp. (PH, Financial) holdings. Nygren also sold his preferred shares of Qurate Retail Inc. (QRTEP.PFD, Financial).
Oakmark's $13.17 billion equity portfolio, which is composed of 52 stocks, is largely invested in the financial services sector with a weight of 35.76%, followed by smaller positions in the communication services (15.63%) and consumer cyclical (14.07%) spaces.
GuruFocus data shows the Oakmark Fund returned 12.9% in 2020, slightly underperforming the S&P 500's return of 18.4%.
Disclosure: No positions.
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