Howard Marks' Oaktree Invests in Energy Turnaround, Ditches Mining Company

The firm's top portfolio updates of the 1st quarter

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May 17, 2021
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Oaktree Capital Management recently disclosed its portfolio updates for the first quarter of 2021, which ended on March 31.

Founded by Howard Marks (Trades, Portfolio) and several fellow investors in 1995, Oaktree Capital Management is a global investing firm that specializes in alternative and credit strategies. The Los Angeles-based firm now has over 39 portfolio managers and 950 employees in offices around the globe. Marks serves as co-chairman (along with Bruce Karsh) and chief financial officer. The firm's core investment philosophy has six tenets: risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing.

Based on the firm's investing criteria, its top buys for the quarter were Chesapeake Energy Corp. (CHK, Financial) and SunOpta Inc. (STKL, Financial), while its biggest sells were Vale SA (VALE, Financial) and Itau Unibanco Holding SA (ITUB, Financial).

Chesapeake Energy

The firm established a new holding of 11,939,117 shares in Chesapeake Energy (CHK, Financial), impacting the equity portfolio by 9.66%. During the quarter, shares traded for an average price of $44.03.

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Based in Oklahoma City, Chesapeake Energy is an American hydrocarbon exploration and development company. The company emerged from Chapter 11 bankruptcy this past February, cancelling the former shares under its restructuring agreement and issuing new shares.

On May 17, shares of Chesapeake Energy traded around $49.99 for a market cap of $4.90 billion. Shares have gained 11% since the company emerged from bankruptcy in early February.

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The company has a financial strength rating of 2 out of 10 and a profitability rating of 5 out of 10. It clearly has issues with taking on unmanageable debt levels given its recent bankruptcy, and the current ratio of 0.82 indicates the company's balance sheet is still on thin ice. The operating margin of -3.80% and net margin of -186.83% indicate the company will need to improve its profitability fast if it wants to stay in business.

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SunOpta

The firm upped its stake in SunOpta (STKL, Financial) by 12,559,113 shares, or 155.19%, for a total holding of 20,651,812 shares. The trade had a 3.46% impact on the equity portfolio. Shares traded for an average price of $14.35 during the quarter.

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SunOpta is a Canadian multinational food company that is focused on natural food, ingredient sourcing, organic food and specialty food. It also practices sustainability in its operations, attempting to reduce its negative impact on the environment.

On May 17, shares of SunOpta traded around $12.56 for a market cap of $1.32 billion and a price-earnings ratio of 16.41. According to the GuruFocus Value chart, the stock is significantly overvalued.

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The company has a financial strength rating of 5 out of 10 and a profitability rating of 3 out of 10. The Piotroski F-Score of 7 out of 9 and Altman Z-Score of 3.31 indicate the company's balance sheet is stable. The return on invested capital is consistently lower than the weighted average cost of capital, indicating the company's growth is not profitable.

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Vale

The firm sold out of its 6,756,996-share investment in Vale (VALE, Financial), which had a -1.95% impact on the equity portfolio. During the quarter, shares traded for an average price of $17.46.

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Vale is a Brazilian multinational metals and mining company headquartered in Rio de Janeiro. It has operations in approximately 30 countries and is the largest producer of iron ore and nickel in the world. Vale is also involved in the logistics, energy and steelmaking businesses.

On May 17, shares of Vale traded around $21.48 for a market cap of $110.21 billion and a price-earnings ratio of 10.38. According to the GF Value chart, the stock is modestly overvalued.

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The company has a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The interest coverage ratio of 7.07 is lower than 82% of industry peers, though the Piotrsoki F-Score of 8 out of 9 suggests financial stability. The operating margin and net margin have been improving in recent years to their current values of 45.90% and 12.20%.

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Itau Unibanco

The firm reduced its Itau Unibanco Holding (ITUB, Financial) stake by 17,962,578 shares, or 69.82%, leaving a remaining investment of 7,765,732 shares. The trade had a -1.89% impact on the equity portfolio. Shares traded for an average price of $5.19 during the quarter.

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Itau Unibanco is a Brazilian financial services company formed from the 2008 merger of Banco Itaú and Unibanco. The largest private sector bank in Brazil, it offers retail, commercial, corporate and private banking services as well as property and casualty insurance products.

On May 17, shares of Itau Unibanco traded around $5.47 for a market cap of 53.45 billion and a price-earnings ratio of 13.20. According to the GF Value chart, the stock is fairly valued.1394377014965743616.png

The company has a financial strength rating of 3 out of 10 and a profitability rating of 4 out of 10. The debt-to-equity ratio of 2.11 is lower than 86% of industry peers, while the cash-debt ratio of 0.66 is less than half the industry median of 2. The return on equity of 12.01% is beating 81% of industry peers, while the return on assets of 0.93% is beating the industry median of 0.86%, though both have been in a downtrend in recent years.

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Portfolio overview

At the end of the quarter, Oaktree Capital Management held 52 common stock positions valued at a total of $5.36 billion. The firm established eight new holdings during the quarter, sold out of 17 stocks and added to or reduced several other positions for a turnover of 21%.

The top holdings as of the quarter's end were Star Bulk Carriers Corp. (SBLK, Financial) with 10.68% of the equity portfolio, Vistra Corp. (VST, Financial) with 9.87% and Chesapeake Energy with 9.66%. In terms of portfolio weighting, the firm was most invested in energy, utilities and industrials.

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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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