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The Top 5 Trades of Jerome Dodson's Parnassus Fund

Fund reveals investments in banks, biotech in 1st-quarter portfolio

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Sydnee Gatewood
Apr 14, 2021
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The Parnassus Fund released its portfolio for the first quarter, which ended March 31, earlier this week.

With the goal of capital appreciation, the San Francisco-based firm, which was founded by

Jerome Dodson (Trades, Portfolio), invests across the capitalization spectrum in discounted companies that have strong competitive advantages, relevant products or services that will compound growth over the long term and quality management teams. Dodson is also known for being socially responsible, which means he takes the environmental and societal impacts of the business into account. He stepped away from managing the portfolio at the beginning of the year, but remains at the firm as chairman.

Taking these criteria into account, the Parnassus Fund established four new positions during the quarter, sold out of four stocks and added to or trimmed a handful of other existing holdings. Notable trades included new investments in Signature Bank (

SBNY, Financial), Silvergate Capital Corp. (SI, Financial) and Berkeley Lights Inc. (BLI, Financial) as well as the divestment of Cerner Corp. (CERN, Financial) and Waste Connections Inc. (WCN, Financial).

Signature Bank

Having previously sold out of Signature Bank (

SBNY, Financial) in the fourth quarter of 2019, Parnassus entered a new 105,000-share position, allocating it to 2.23% of the equity portfolio. The stock traded for an average price of $197.29 per share during the quarter.

The New York-based commercial bank has a $13.22 billion market cap; its shares were trading around $233.95 on Wednesday with a price-earnings ratio of 23.01, a price-book ratio of 2.11 and a price-sales ratio of 7.61.

The GF Value Lines suggests the stock is significantly overvalued currently based on its historical ratios, past performance and future earnings projections.

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The valuation rank of 4 out of 10 supports this assessment since the share price and price-sales ratio are both approaching multiyear highs.

GuruFocus rated Signature Bank's financial strength 3 out of 10. Although the interest coverage is comfortable, the company's assets are building up at a faster rate than revenue is growing.

The company's profitability fared better, scoring a 6 out of 10 rating on the back of strong margins and returns that outperform a majority of competitors. Signature Bank also has a moderate Piotroski F-Score of 6, indicating operations are stable, and consistent earnings and revenue growth has contributed to a predictability rank of four out of five stars. According to GuruFocus, companies with this rank return an average of 9.8% annually over a 10-year period.

Of the gurus invested in Signature Bank,

First Pacific Advisors (Trades, Portfolio) has the largest stake with 1.75% of outstanding shares. Steven Romick (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Pioneer Investments (Trades, Portfolio), John Hussman (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) also own the stock.

Silvergate Capital

The fund invested in 164,797 shares of Silvergate Capital (

SI, Financial), dedicating 2.2% of the equity portfolio to the holding. Shares traded for an average price of $119.33 each during the quarter.

The bank holding company, which is headquartered in La Jolla, California, has a market cap of $3.8 billion; its shares were trading around $161.60 on Wednesday with a price-earnings ratio of 119.04, a price-book ratio of 10.36 and a price-sales ratio of 35.01.

According to the Peter Lynch chart, the stock is overvalued.

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Silvergate's financial strength was rated 4 out of 10 by GuruFocus. Although the company has sufficient interest coverage, the Beneish M-Score of -1.62 warns it could have potentially manipulated its financial statements.

The company's profitability fared worse with a 2 out of 10 rating. Although it has strong margins and returns that outperform over half of its industry peers, the low Piotroski F-Score of 3 indicates its operating conditions are in poor shape.

Catherine Wood (Trades, Portfolio) is Silvergate's largest guru shareholder with a 2.76% holding. Dodson's firm holds 0.7%.

Berkeley Lights

Parnassus picked up 324,713 shares of Berkeley Lights (

BLI, Financial), giving it 1.53% space in the equity portfolio. During the quarter, the stock traded for an average per-share price of $68.37.

The Emeryville, California-based biotech company, which specializes in digital cell biology to develop biotherapeutics and other cell-based products using its Berkeley Lights Platform, has a $3.3 billion market cap; its shares were trading around $50.15 on Wednesday with a price-book ratio of 13.12 and a price-sales ratio of 44.98, which GuruFocus says are all approaching one-year lows.

Based on the price chart, the stock has fallen nearly 25% since its initial public offering in July 2020.

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GuruFocus rated Berkeley Lights' financial strength 6 out of 10 on the back of a stable cash-debt ratio of 6.19 and a robust Altman Z-Score of 35.17.

The company's profitability scored a 1 out of 10 rating. Although its margins and returns are negative, they all outperform a majority of Berkeley Lights' competitors. It also has a moderate Piotroski F-Score of 4.

With a 2.28% stake, Wood is Berkeley Lights' largest guru shareholder.

Baillie Gifford (Trades, Portfolio) & Co. and Ron Baron (Trades, Portfolio) also have positions in the stock.

Cerner

With an impact of -2.48% on the equity portfolio, Parnassus dumped its 334,478 remaining shares of Cerner (

CERN, Financial). The stock traded for an average price of $75.13 per share during the quarter.

GuruFocus estimates the fund gained 29.86% on the investment, which was established in the fourth quarter of 2018.

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The health care information technology company, which is headquartered in Kansas City, Missouri, has a market cap of $22.21 billion; its shares were trading around $73.49 on Wednesday with a price-earnings ratio of 29.05, a price-book ratio of 5.02 and a price-sales ratio of 4.12.

The GF Value Line suggests the stock is fairly valued currently.

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The valuation rank of 8 out of 10, however, is more supportive of undervaluation as the share price and price ratios are approaching either multiyear highs or lows.

Cerner's financial strength was rated 6 out of 10 by GuruFocus, driven by a high Altman Z-Score of 7.03. The return on invested capital also eclipses the weighted average cost of capital, indicating good value creation.

The company's profitability fared even better with a 9 out of 10 rating. Although the operating margin is in decline, Cerner has strong returns that outperform a majority of industry peers and a high Piotroski F-Score of 7, which indicates business conditions are healthy. Despite recording a slowdown in revenue per share growth over the past 12 months, the company still has a 3.5-star predictability rank. GuruFocus says companies with this rank return, on average, 9.3% annually.

The

Vanguard Health Care Fund (Trades, Portfolio) is Cerner's largest guru shareholder with a 2.88% stake. Other top guru investors are Al Gore (Trades, Portfolio), the Parnassus Endeavor Fund (Trades, Portfolio), Pioneer, Dalio, Jeff Auxier (Trades, Portfolio), Jones, PRIMECAP Management (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Mairs and Power (Trades, Portfolio) and Ainslie.

Waste Connections

Impacting the equity portfolio by -1.39%, the fund sold its 143,717 remaining shares of Waste Connections (

WCN, Financial). During the quarter, shares traded for an average price of $101.53 each.

GuruFocus data shows Parnassus gained an estimated 13.2% on the investment since establishing it in the second quarter of 2020.

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The Woodlands, Texas-based waste management company, which has operations in the U.S. as well as Canada, has a $30.11 billion market cap; its shares were trading around $114.53 on Wednesday with a price-earnings ratio of 147, a price-book ratio of 4.39 and a price-sales ratio of 5.55.

According to the GF Value Line, the stock is modestly overvalued currently.

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The valuation rank of 1 out of 10 aligns with this assessment since the share price and price ratios are all nearing 10-year highs.

GuruFocus rated Waste Connections' financial strength 5 out of 10. In addition to adequate interest coverage, the Altman Z-Score of 3.32 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also slightly surpasses the WACC.

The company's profitability scored a 7 out of 10 rating. Although the operating margin is in decline, it is still outperforming versus other industry players. Waste Connections' returns, however, are underperforming over half of its competitors. It also has a moderate Piotroski F-Score of 5, but the one-star predictability rank is on watch since revenue per share growth has slowed over the past year. GuruFocus data shows companies with this rank return, on average, 1.1% annually.

Simons' firm is the company's largest guru shareholder with 0.49% of outstanding shares. Baron,

Mario Gabelli (Trades, Portfolio), Pioneer and Jones also have positions in the stock.

Additional trades and portfolio composition

Dodson's firm also entered a new position in solar energy company Sunrun Inc. (

RUN, Financial) during the quarter and eliminated its holdings of Jack Henry & Associates Inc. (JKHY, Financial) and C.H. Robinson Worldwide Inc. (CHRW, Financial).

Parnassus' $1.07 billion equity portfolio, which consists of 45 stocks, is largely invested in the technology sector with a weight of 36.94%, followed by health care at 19.17% and consumer cyclical at 12.4%.

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The Parnassus Fund returned 28.61% in 2020, outperforming the S&P 500's 18.4% return.

Disclosure: No positions.

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