Hotchkis & Wiley has revealed its portfolio for the first quarter of 2021. Major trades include a new buy into Berkshire Hathaway Inc. (BRK.B, Financial), additions to its F5 Networks Inc. (FFIV, Financial) and Bank of New York Mellon Corp. (BK, Financial) holdings, selling out of PNC Financial Services Group Inc. (PNC, Financial) and a reduction in its General Electric Co. (GE, Financial) 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 465 stocks, with 14 new holdings. It was valued at $32.80 billion and has seen a turnover rate of 8%. Top holdings at the end of the quarter were American International Group Inc. (AIG, Financial), Wells Fargo & Co. (WFC, Financial), Citigroup Inc. (C, Financial), General Electric and Anthem Inc. (ANTM, Financial).
By weight, the top three sectors represented are financial services (30.43%), industrials (12.30%) and technology (12.15%).
F5 Networks
The first quarter saw the firm boost its position in F5 Networks (FFIV, Financial) by 497.24% with the purchase of 2.27 million shares. During the quarter, the shares traded at an average price of $197.19. Overall, the purchase had a 1.45% impact on the equity portfolio and GuruFocus estimates the total loss of the holding at 3.08%.
F5 Networks is a market leader in the application delivery controller market. The company sells products for networking traffic, security and policy management. Its products ensure applications are safely routed in efficient manners within on-premises data centers and across cloud environments. More than half of its revenue is based on providing services, and its three customer verticals are enterprises, service providers, and government entities. The Seattle-based firm was incorporated in 1996 and generates sales globally.
On June 3, the stock was trading at $184.05 with a market cap of $10.95 billion. According to the GF Value Line, the shares are trading at a fair value rating.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 7 out of 10. There are currently two severe warning signs issued for assets growing faster than revenue and a declining operating margin. The strong profitability rank is supported by operating and net margins that beat at least 70% of competitors.
Berkshire Hathaway
The largest new position established by the firm during the quarter was Berkshire Hathaway (BRK.B, Financial). The holding was established with 1.70 million shares that traded at an average price of $242.84 during the quarter. GuruFocus estimates the firm has already gained 19.99% on the holding and the purchase had a 1.33% impact overall.
Berkshire Hathaway is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm's core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. Berkshire has used the excess cash thrown off from these and its other operations over the years to acquire Burlington Northern Santa Fe (railroad), Berkshire Hathaway Energy (utilities and energy distributors), and the companies that make up its manufacturing, service and retailing operations (which include five of Berkshire's largest noninsurance pretax earnings generators: Precision Castparts, Lubrizol, Clayton Homes, Marmon and IMC/ISCAR). The conglomerate is unique in that it is run on a completely decentralized basis.
As of June 3, the stock was trading at $291.96 per share with a market cap of $665.80 billion. The GF Value Line shows the shares trading at a fair value rating.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 6 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. The company’s cash-to-debt ratio of 0.52 ranks it worse than 79.55% of competitors in the insurance industry and is well below the 10-year high of 5.77.
PNC Financial Services Group
The firm cut ties with its PNC Financial Services Group (PNC, Financial) holding during the quarter. The remaining 1.80 million shares were sold throughout the quarter for an average price of $164.89. The sale had a -0.94% impact on the portfolio and GuruFocus estimates the firm gained 52.54% on the holding throughout its lifetime.
PNC Financial Services Group is a diversified financial services company offering retail banking, corporate and institutional banking, asset management and residential mortgage banking. PNC has 2,300 branches in 21 states and the District of Columbia and is the seventh- largest U.S. bank by assets.
The stock was trading at $196.22 per share with a market cap of $83.17 billion on June 3. According to the GF Value Line, the shares are modestly overvalued.
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 5 out of 10. There are currently no severe warning signs issued for the company. The company has maintained consistent revenue and net income over the last decade with consistent revenue growth per share.
Bank of New York Mellon
Another holding that grew during the quarter was Bank of New York Mellon (BK, Financial). The long-term holding grew by 200.74% with the purchase of 5.45 million shares. The shares traded at an average price of $43.95 during the quarter. Overall, the purchase had a 0.79% impact on the equity portfolio and GuruFocus estimates the total gain of the holding at 20.25%.
BNY Mellon is a global investment company involved in the management and servicing of financial assets throughout the investment lifecycle. The bank provides financial services for institutions, corporations and individual investors, and delivers investment management and investment services in 35 countries and more than 100 markets. BNY Mellon is the largest global custody bank in the world, with about $41.1 trillion in custody and administration (as of Dec. 31, 2020), and can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon's asset management division manages about $2.2 trillion in assets.
On June 3, the stock was trading at $52.19 per share with a market cap of $45.69 billion. The shares are trading at a fair value rating according to the GF Value Line.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 6 out of 10. There is currently one severe warning sign issued for poor financial strength. The company has struggled to maintain profits with the weighted average cost of capital eating away at the return on invested capital.
General Electric
The firm pulled back its General Electric (GE, Financial) by 16.75% with the sale of 19.40 million shares during the quarter. The shares traded at an average price of $12.14. GuruFocus estimates the total gain of the holding at 30.43% and the sale had a -0.73% impact on the equity portfolio overall.
GE was formed through the combination of two companies in 1892, including one with historical ties to American inventor Thomas Edison. Today, GE is a global leader in air travel, precision health and in the energy transition. The company is known for its differentiated technology and its massive industrial installed base of equipment sprawled throughout the world. That installed base most notably includes aerospace engines, gas and steam turbines, onshore and offshore wind turbines, as well as medical diagnostic and mobile equipment. GE earns most of its profits on the service revenue of that equipment, which is generally higher-margin.
As of June 3, the stock was trading at $14.09 per share with a market cap of $123.69 billion. According to the GF Value Line, the shares are trading at a significantly overvalued rating.
GuruFocus givest 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 three severe warning signs for a low Piotroski F-Score, declining revenue per share and an Altman Z-Score of 1.46 placing the company in the distress column. The company has struggled with cash flows over the last several years and has seen net income fall into negative values multiple times.
