John Rogers (Trades, Portfolio), leader of Ariel Investments, disclosed his firm's first-quarter portfolio earlier this month.
The guru's Chicago-based firm invests in undervalued small and mid-cap companies that have sustainable competitive advantages, high barriers to entry and predictable fundamentals that allow for double-digit earnings growth. Like the tortoise featured in the firm's logo, Rogers emphasizes that patience, independent thinking and a long-term outlook are necessary for generating good returns.
In its first-quarter letter, the Ariel Fund commented on the market's recovery on the back of increased Covid-19 vaccine supply and fiscal stimulus packages. It noted:
"We expect many of our domestic holdings to benefit from easing restrictions, as well as corporate earnings growth across cyclical sectors, such as Industrials, Financials and Consumer Discretionary. Meanwhile, we stand ready to take advantage of any pull backs in the market on negative news or sentiment. We strongly believe the dedicated patient investor that stays the course and consistently owns differentiated businesses with solid competitive positioning and robust balance sheets will deliver superior returns over the long run."
Keeping these developments in mind, the fund entered seven positions during the three months ended March 31, sold out of 11 holdings and added to or trimmed a slew of other existing investments. The most notable trades included new holdings in Axalta Coating Systems Ltd. (AXTA, Financial) and nVent Electric PLC (NVT, Financial), a boost to the Lazard Ltd. (LAZ, Financial) stake and reductions to the ViacomCBS Inc. (VIAC, Financial) and Baidu Inc. (BIDU, Financial) positions.
Axalta Coating Systems
The fund invested in 4.8 million shares of Axalta Coating Systems (AXTA, Financial), allocating 1.4% of the equity portfolio to the stake. The stock traded for an average price of $28.62 per share during the quarter.
The Philadelphia-based company, which manufactures a variety of paints and coatings for industrial applications, has a $7.32 billion market cap; its shares were trading around $31.41 on Monday with a price-earnings ratio of 87.33, a price-book ratio of 5.39 and a price-sales ratio of 1.94.
The GF Value Line shows the stock is modestly overvalued currently based on historical ratios, past performance and future earnings projections.
GuruFocus rated Axalta's financial strength 4 out of 10 on the back of weak interest coverage as well as an Altman Z-Score of 1.86, which indicates it is under some pressure since revenue per share has declined over the past five years. The return on invested capital has also fallen below the weighted average cost of capital, indicating issues with creating value while the company is growing.
The company's profitability scored a 6 out of 10 rating even though the operating margin is in decline and its returns on equity, assets and capital are underperforming over half of its competitors. Axalta is supported, however, by a moderate Piotroski F-Score of 5, implying business conditions are stable.
Of the gurus invested in Axalta, Warren Buffett (Trades, Portfolio) has the largest stake with 5.96% of outstanding shares. Other top guru shareholders are Jim Simons (Trades, Portfolio)' Renaissance Technologies, Wallace Weitz (Trades, Portfolio), George Soros (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Pioneer Investments (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
NVent Electric
Rogers' firm picked up 3.01 million shares of nVent Electric (NVT, Financial), dedicating 0.83% of the equity portfolio to the position. Shares traded for an average price of $25.61 each during the quarter.
Headquartered in the U.K., the company, which provides electrical connection and protection solutions, has a market cap of $5.33 billion; its shares were trading around $31.78 on Monday with a price-book ratio of 2.17 and a price-sales ratio of 2.66.
According to the GF Value Line, the stock is significantly overvalued currently.
In the quarterly commentary, the Ariel Fund noted that "Axalta is emerging from the shadow of its former parent, DuPont."
"We expect Axalta to continue to gain market share from ongoing consolidation in its refinishing business and further improve its margin profile through cost savings programs," it added.
NVent's financial strength was rated 5 out of 10 by GuruFocus. While the company has adequate interest coverage, the Altman Z-Score of 2.24 indicates it is under some pressure since the revenue per share has declined over the past 12 months.
The company's profitability scored a 6 out of 10 rating. Even though nVent's operating margin is in decline, it still outperforms over half of its industry peers. Despite having negative returns, it is also supported by a moderate Piotroski F-Score of 4.
With a 2.43% stake, Mairs and Power (Trades, Portfolio) is nVent's largest guru shareholder. NWQ Managers (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Simons' firm, Louis Moore Bacon (Trades, Portfolio), Richard Snow (Trades, Portfolio), Greenblatt and Pioneer also own the stock.
Lazard
With an impact of 0.6% on the equity portfolio, Ariel increased its holding of Lazard (LAZ, Financial) by 25.4%, buying 1.4 million shares. The stock traded for an average per-share price of $42.52 during the quarter.
The fund now holds 6.9 million shares total, accounting for 2.98% of the equity portfolio. It remains Ariel's sixth-largest holding. GuruFocus estimates it has gained 25.18% on the investment since establishing it in the third quarter of 2009.
The Bermuda-based company, which provides asset management, financial advisory and other banking services, has a $4.94 billion market cap; its shares were trading around $46.90 on Monday with a price-earnings ratio of 12.64, a price-book ratio of 6.5 and a price-sales ratio of 1.93.
Based on the GF Value Line, the stock is modestly overvalued currently.
The valuation rank of 9 out of 10, however, leans more toward undervaluation even though the share price and price-sales ratio are approaching two-year highs.
In the quarterly letter, Ariel said Lazard "weighed on relative performance," but fundamentals "remain robust and prices currently represent a healthy discount."
GuruFocus rated Lazard's financial strength 3 out of 10 on the back of weak debt ratios and an Altman Z-Score of 1.98 that indicates the company is under some pressure. The ROIC eclipses the WACC, however, indicating good value creation as the company grows.
The company's profitability fared better, scoring an 8 out of 10 rating, driven by margins and returns that outperform over half of its competitors. Lazard also has a high Piotroski F-Score of 8, which indicates operations are healthy, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Rogers is the company's largest guru shareholder with a 6.6% stake. Mason Hawkins (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Simons' firm, Hotchkis & Wiley, Third Avenue Management (Trades, Portfolio) and Pioneer also own shares of Lazard.
ViacomCBS
Impacting the equity portfolio by -1.24%, Ariel disposed of 2.9 million shares of ViacomCBS (VIAC, Financial), reducing the position by 79.95%. During the quarter, the stock traded for an average price of $61.05 per share.
The fund now holds 739,969 shares total, giving it 0.33% space in the equity portfolio. GuruFocus data shows it has gained an estimated 87.15% on the long-held investment.
The mass media company headquartered in New York, which focuses primarily on film and television production, has a market cap of $26.79 billion; its shares were trading around $41.21 on Monday with a price-earnings ratio of 9.1, a price-book ratio of 1.4 and a price-sales ratio of 0.99.
The GF Value Line suggests the stock is significantly overvalued currently.
The valuation rank of 10 out of 10, however, is more indicative of undervaluation.
Despite being a "top contributor for the fourth consecutive quarter," the firm noted in its quarterly commentary that it reduced its position "as prices moved closer to our assessment of intrinsic value." Doing so enabled it to insulate the portfolio "from the largest weekly decline in the stock's history" following the announcement of "a mandatory convertible preferred stock offering."
GuruFocus rated ViacomCBS's financial strength 4 out of 10. In addition to weak interest coverage, the Altman Z-Score of 1.66 warns the company could be at risk of bankruptcy if it does not improve its liquidity. Its assets are also building up at a faster rate than revenue is growing, indicating it may be becoming less efficient. The ROIC surpasses the WACC, however, indicating it has good value creation.
The company's profitability scored an 8 out of 10 rating despite having a declining operating margin. ViacomCBS is supported by strong returns that outperform a majority of industry peers as well as a moderate Piotroski F-Score of 6. Although revenue per share had declined over the past year, the company still has a 3.5-star predictability rank. GuruFocus says companies with this rank return an average of 9.3% annually.
Simons' firm has the largest stake in ViacomCBS with 0.87% of outstanding shares. Other top guru shareholders include Soros, David Tepper (Trades, Portfolio), Pioneer and Philippe Laffont (Trades, Portfolio).
Baidu
Reducing the position by 16.63%, Rogers' firm sold 487,445 shares of Baidu (BIDU, Financial), impacting the equity portfolio by -1.19%. Shares traded for an average price of $261.90 each during the quarter.
Ariel now holds 2.4 million shares total, which represent 5.24% of the equity portfolio. It remains the firm's top holding. It has gained an estimated 29.41% on the investment so far according to GuruFocus.
The Chinese company, which provides internet and artificial intelligence products, has a $65.65 billion market cap; its shares were trading around $188.92 on Monday with a price-earnings ratio of 9.03, a price-book ratio of 1.88 and a price-sales ratio of 3.89.
According to the GF Value Line, the stock is modestly overvalued currently.
Baidu's financial strength was rated 6 out of 10 by GuruFocus. While it has adequate interest coverage, the Altman Z-Score of 2.94 indicates it is under some pressure since assets are building up at a faster rate than revenue is growing. The WACC also slightly eclipses the ROIC.
The company's profitability scored an 8 out of 10 rating. Although the operating margin is in decline, it is supported by strong returns that outperform a majority of competitors as well as a moderate Piotroski F-Score of 6. Baidu also has a one-star predictability rank.
With a 2.72% stake, PRIMECAP is the company's largest guru shareholder. Catherine Wood (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Simons' firm, Dodge & Cox and Steven Cohen (Trades, Portfolio) also have significant positions in Baidu.
Portfolio composition and performance
During the quarter, the fund also entered positions in Telefonica Brasil SA (VIV, Financial), Weibo Corp. (WB, Financial), TIM SA (TIMB, Financial), Sanofi SA (SNY, Financial) and SuRo Capital Corp. (SSSS, Financial).
The Ariel Fund's $10.15 billion equity portfolio, which is composed of 136 stocks, is largely invested in the financial services (20.92%), industrials (16.44%) and communication services (16.40%) sectors.
The fund posted a return of 10.02% for fiscal 2020, underperforming the S&P 500's 18.4% return.
Disclosure: No positions.
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
